Current Farmland Values…“Be careful out there.”

Posted on October 14, 2011. Filed under: David Kappelman |

Hill Street Blues, a popular television drama series in the 1980’s, had one line in its script that was repeated every week. After the shift sergeant was finished reviewing the current day’s events and cases to be dealt with, he would dismiss his charges to the perils of the streets of New York city with the following advice. “Be careful out there.”

The recent run up in land values, more than doubling over the last 10 years, has farmers, lenders, ag economists, and investors all wondering, “Is there a bubble in the farmland market?” and “What perils lie ahead if I do, or don’t, participate in the run up?” “Is it possible that land values could be significantly lower in coming years?” In trying to answer this, let’s look at some of the dynamics of what can drive land values up…or down.

  • Current and expected future levels of farm earnings
  • Land has a finite supply and, with good stewardship, has an infinite life
  • Number of forced sales and supply of land on the market
  • Biofuel demand…ethanol production currently consumes nearly 40% of US corn production
  • Oil prices and its impact on the demand and profitability of the ethanol industry
  • Export demand for US commodities…with China leading the pack
  • Interest rates
  • Current inflation rate and expectations of future inflation rates
  • Instability of other investments
  • A rapid increase or decrease in the costs of agricultural inputs
  • World wide weather patterns and foreign crop production

There are more.

In looking at this list, we can say that many of these factors have been aligned in the last decade to leave a positive impact on US farmland values. Perhaps the question to ask ourselves in analyzing a farmland purchase today is not “if” any of these dynamics will change in the future and affect farmland values…but rather “when” will they change. And if they do change, will the earnings and balance sheet of an individual farm operation be strong enough to bend, sustain the adversity, and remain viable in the long run. That is where careful financial analysis, shocking a cash flow for unforeseen changes in net income, and proper debt structure  to allow a cushion for adversity, is critical in making a land purchase decision today. Letting emotions drive a major financial decision is dangerous.

We should feel good about the future of US agriculture. No other nation on this planet has the natural resources, the education and expertise, the technology, and the capital to produce food like we do. An increasing world population creates a growing market for our production. But let’s not forget to look back over history and question whether annual double digit increases in land values are sustainable. The one lesson we seem to keep forgetting about history repeating itself…is that history will repeat itself.

“Be careful out there!”

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3 Responses to “Current Farmland Values…“Be careful out there.””

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Good piece with some concise points, although worth bearing in mind that the remedy to a growing disparity between productivity and demand is twofold, bring more land under cultivation (as in the post depression era), or increase yield (as in the 1970s Green Revolution).

Neither of these options remain possible as the vast majority of suitable land is already being cultivated, and yields are increasing by less than 1% per year, less than the rate of population growth.

Without either of these two weapons available to combat the issue of rising food prices, it is likley that farmland values will continue to increase as demand rises and exisitng farmland simply cannot be replaced.

Whilst values willl rise and fall, in the long-term farmland represents the second most valuable asset on earth, second only to water, and Investors holding productive agricultural assets will contorl a finite resource that is essential to the survival of the human race.

Your point is well taken. There is good reason to be bullish on farmland…in the long term…for all the reasons stated. An individual farmer whose livelihood and viability of their business depends on cash flow needs to be aware that changes in any number of factors could impact them drastically…in the short term….and put them at risk if they are overleveraged. Perhaps we are in a new era for agriculture and will not see history repeating itself as it pertains to rapid run-ups in farmland values. Some moderation and flattening of the rate of increase would be healthy. -Dave

I agree completely. I think one major difference here for operators when compared to previous boom and busts as in the 1970s, at that time farmers were overlevergaed and interest rate rises killed businesses instantly as interest made up a large potrtion of outgoings. Right now, farmers have less debt than ever before, and many are seeing this as an opportunity to dipose of some assets to pay down debt whilst renting the land they sold back for a rental yield of 3.9%.

I thing the most likely thing to affect growers is going to be the cost of production as the price of key inputs such as fuels, fertilisers and labout become more expensive. The only way to comabt that is to sell your goods for a higher price to compensate for higher costs, and i think in an environemnt with more buyers than sellers, food prices are destined to rise globally.


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