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Are We Headed For A Farmland Crash?

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As land values escalate, are we headed for a farmland crash?

Land -- God isn’t making any more of it. And, with other investment opportunities lacking, farmers, ranchers, and plenty of people outside of agriculture, continue to eagerly invest in this precious asset. The result has been extremely high and growing land prices. Could we be headed for a crash?

It’s hard to see how the investment in land pencils out. In my neck of the woods, pasture is selling for around $2,000/acre and $5,000/acre for cropland. Pasture rent is $50-100/acre, and crop ground rent ranges from $150-300/acre. That’s up significantly over the past five years or so.

In an article that appeared in the American, farmer and commentator Blake Hurst writes, “Farmers have cash, and nowhere to invest it but farmland. Farmers largely ignore equities, as they tend to balance the inherent risk in farming by investing in what they perceive as less risky places. We aren’t dumb, however, and have figured out that it's a losing game to invest in bonds or CDs at rates less than inflation while we’re in tax brackets we never even knew existed.

“So, farmland prices are booming. Land prices in the heart of the Corn Belt have increased at a double-digit rate in six of the last seven years. According to Federal Reserve studies, farmland prices were up 15% last year in the most productive part of the Corn Belt, and 26% in the western Corn Belt and High Plains. Closer to home, a neighbor planning his estate had an appraisal done in 2010 and again in late 2012. In that two-year period, the value of his farm had doubled.

"According to Iowa State economist Mike Duffy, Iowa land selling for $2,275/acre a decade ago is now at $8,700/acre. A farm recently sold in Iowa for $21,900/acre. “A debt-to-asset ratio of 30% can enter dangerous territory with a land price drop of 50%, which sounds like a lot, until you remember that is a price level last seen only 24 months ago in much of the Midwest.

“The number of farmers in the Kansas survey with a 40% debt-to-asset ratio is higher now than it was in 1979, and those farms with a debt-to-asset ratio of over 70% are three times as numerous today.”

Many fear a return of the 1980s crash, but, according to the Sioux Falls, SD, Argus Leader, farmers are better prepared to weather a financial crash this time around.

“The inevitable drop in land prices is unlikely to be as sharp as in the early 1980s, when new purchases were financed largely with debt and less with the farmer’s own capital, say economists and bankers who work in the agricultural industry. When interest rates on their loans soared and crop prices declined, many farmers no longer had the income they needed to pay the bank. They had no choice but to unload their real estate, contributing to the sharp downdraft in land values.

 

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“Since then, farmers have become more financially conservative, leaving them in a better position to weather a downturn. Land purchases during the past few years have been made with growers regularly using 50-75% of their own cash. And the finances of the farm are stronger than ever, with the debt-to-asset ratio expected to be the lowest level on record this year, according to the USDA.

A drop in land prices now would mean farmers lose the investment of their own cash rather than being left in a lurch with the bank. They still might feel the heat financially, but it’s likely to prevent many farmers from getting irreversibly harmed and, at the same time, limit the severity of a drop in land prices.”

It’s no secret farmers hate liquidity; they are always looking to put their cash to work -- whether it be buying a new tractor or a piece of ground. I think the lesson here is to be conservative in what you purchase and make sure it makes sense for your operation. It’s easy to bite off more than you can chew, and if I’ve learned anything in the last four years being home on the ranch, it’s that I’ve got to be patient and let my investments work for me.

Are you buying land? What are land values in your neck of the woods?

 

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Discuss this Blog Entry 11

dengin (not verified)
on Apr 2, 2013

If farmers have so much cash, pay off your debt. Not just some of it but all of it. Do a cash flow anaylasis and see what happens when you have no debt! Yes you pay a little more tax but so far the gov't does not take it all and interest deductions are not tax credits.

Frank Schlichting (not verified)
on Apr 2, 2013

Maybe the old timers weren't as crazy as we thought. Back in the old days if you had spare cash you bought gold and buried it in the back yard. Probably still the safest investment available. So long as you don't forget where your bury it!

Katlyn Rumbold (not verified)
on Apr 2, 2013

I was literally just reading this article in The American yesterday and was putting together a post for my blog!! Great article!

Anonymous (not verified)
on Apr 2, 2013

I remember in the early 80s when the implement dealer in Taylor texas was buying semi loads of equipment and selling it in our area. The busts allways start in the midwest and slowly work south. How can you pay 20,000 for farm land or pay 3-500 acre rent and make it when corn goes back to 3 dollars a bushel and soybeans to 5 dollars a bushel. I was going to buy a newer combine this year but I think I will wait until they get cheaper. GOOD LUCK

Anonymous (not verified)
on Apr 2, 2013

Farmers have cash? What type of farmers are we talking about, not a cattle farmer. Smaller cattle operations have been and continue to barely keep their operations a float. They do not reap the government benefits that some farmers continue to do. Most cattle farmers profits will not allow them to purchase additional land if their income is solely coming from raising cattle. I have never seen a year where an average cattle farmer could go to a auto dealership and completely pay for a VERY nice vehicle with a check that they received from the government. You let me make the money these farmers are making, sure I'll purchase some more land with the governments money. Just as stated in the article, let corn prices drop to $3 and lets see what land prices do! Seven dollar plus corn eats up all profits of the cattle industry, just look at how long the feedyards have been operating in the red.

John R. Dykers, Jr. (not verified)
on Apr 2, 2013

Vertical integration of beef production requires lots of skill, but it is biologically and economically sound.

Anonymous (not verified)
on Apr 2, 2013

the value of farmland is not set by what the current owner paid for the land or the current owner's interest rate and cash flow. The value is set by what new buyers can afford to pay for the land. If you increase interest rates 2% and drop corn prices to $5.00 per bushel, you cut the current prices paid for Iowa farmland in half.

on Apr 3, 2013

Great discussion so far. I appreciate everyone's insights.

Anonymous (not verified)
on Apr 3, 2013

I bought 1200 acres since 2004 and was the best thing I ever did , its more of a timeing isue that was a great time to buy now is a scary time to buy and we raise hol. steers and with by products we are makeing good money evan now

Anonymous (not verified)
on Apr 3, 2013

This sale was just last week--with investors looking for farm land.

http://www.mlive.com/news/kalamazoo/index.ssf/2013/03/stamp_farms_land_a...

Anonymous (not verified)
on Apr 3, 2013

The livestock sector as a whole is bleeding red, the profits have not been there. If the USDA is close with March 1 stocks report this shows the true shrink in the breeding herds and unless ethanol ramps up in usage or China buys more commodity grains will continue to narrow the gap between old crop and new crop. Prices will narrow and without gov't payments there will not be enough of a safety net for the average farmer. Possibly a quiet exit of many crop farmers whom heavily leveraged themself during the golden era of ag. However, everyone’s situation is unique. Remember it wasn't all that long ago that the LDP was your profit. Land should shrink up about a third in the next few years though that will not help the current situation and any land leases needed to be made in the meantime. The best thing that could happen is the markets fall back to reality and keep all farmers on a level playing field so there is opportunity for young individuals wanting to farm like Dad does!

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Amanda Radke

A fifth-generation rancher from Mitchell, SD, Amanda grew up on a purebred Limousin cattle operation in which she and husband Tyler are active. She graduated with a degree in agriculture journalism...

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