After a decade of cheery headlines about roaring farmland prices, we now seem to have one report after another telling us land prices are falling and projecting more of the same. But how much?
Nobody knows. It’s probably a good time to be cautious, but I don’t think we’re in for a major storm. Yes, the Federal Reserve Bank of Chicago notes that the decline we’ve seen in Iowa for a while now is spreading to other states in the region. The various surveys differ due to time frame and methodologies, but they all point to falling prices. We’ve seen this for a couple of years now in Iowa, but now the decline is spreading throughout the region.
Even so, unless you bought your farm in the past few months, you’re probably sitting on a profit. Economist Mike Duffy notes in Iowa State’s 2014 survey that at the end of 2014, prices were still double what they were a decade ago, and 81 percent higher than in 2009. Even for land acquired in the last few years, buyers haven’t had to take on the big mortgages that led to trouble in past markets.
The Fed study found that farm credit conditions revealed only modest stress, and “the vast majority of farm operations are expected to have no trouble qualifying for operating credit in 2015. Thus, large numbers of forced sales of farmland are unlikely to occur in 2015. By avoiding such a scenario, farmland values should simply drift lower over the coming months.”
Given the current level of commodity prices, that’s about the best we can hope for. We’re entering into a period during which we’ll all experience some disappointments:
Buyers will be disappointed with the lack of bargains. As I’ve noted in recent posts and presentations, we seem to have a large spread between “A” quality farms and those of marginal quality, and the higher quality land has been holding its value much better. You could always hold out and hope for lower prices later, but trying to time the market is rarely wise. If buying a farm makes sense in terms of your financial plan and you have the cash, go ahead and buy it.
Sellers will be disappointed at the prices they receive. By nature we all want to “sell at the top,” though few of us ever do. That’s OK. As I noted earlier, unless you bought your farm very recently, you should have a nice profit. If you’re planning to retire in the next few years, this might be a good point to sell, and perhaps you can lease the land back if you want to farm a little longer. If you decide to sell, it’s important to be realistic about current values and price your land accordingly. Setting too high a price or reserve can make it hard to sell the property if you fail on the first attempt, because buyers might shy away, remembering that it had been previously overpriced.
Farmers will be disappointed with 2015 profits. By all indications, 2015 is shaping up to be a rough year for farmers. Corn and soybean prices are expected to continue at low levels, and input prices are going to rise. The USDA forecasts that net farm income will be $73.6 billion in 2015 – down nearly 32 percent from the USDA’s 2014 forecast. Things can always turn around, of course, but it’s hard to see where much help will come from for the 2015 crop year. The Federal Reserve seems intent on raising interest rate prices starting this summer. It would be nice to see China reverse course and start importing a lot more corn, but I wouldn’t bet on that. China is producing more of its own grains, and the USDA has been slashing its forecasts for China imports.
Investors will be disappointed with next year’s rents. Rents fell in many cases for 2015, but probably not enough to reflect the outlook for farm profits – at least, not based on current data. It’s awfully early in the year, and there are always some surprises, but in the long run, rents have to settle at a level that enables operators to farm at a profit. As a result, it’s likely that the next round of rental agreements will be unwelcome news to landlords.
Looking Ahead: Watch Your Balance Sheet
Unless you’re flush with cash, this is probably not a good time to spend money you don’t have to. Postpone that European vacation, and nurse your existing combines and tractors along another year or so. When commodity prices and profits improve, you want to be in a financial position to take advantage of the opportunities that will present themselves, and you can’t do that if you’re too deeply in debt. Already, farmers are borrowing more. Bankers in the Chicago Federal Reserve survey reported that loan demand during the fourth quarter of 2014 jumped to the highest level since 1994, and the second highest since 1979.
Look at this as a time for nurturing some good habits, like sound financial management. It’s during the good times that we’re tempted to overspend and make the kinds of mistakes that create trouble down the road.