Professional farm management even more important in a complex market

For several years now, everybody’s focus has been on farmland prices, and notably on the dramatic rise in prices per acre. But now, we’re seeing a shift to something even more basic: Farm profitability.

The narrative is probably familiar to you by now. Corn, soybeans and other commodities are down sharply, and input prices keep rising. Meanwhile, a lot of farmers are paying cash rents that don’t yet reflect this year’s expected crop prices. That’s likely to hurt net income, and bankers are already starting to see its effects, with farmers borrowing more and paying back existing loans more slowly.

Unless the commodity markets surprise everybody (as they’ve been known to do), a significant number of farmers are probably going to lose money on their 2015 crops. It’s not a crisis for most – not yet. But by some estimates, up to 4 percent of farmers are currently facing serious liquidity challenges. Bankruptcy filings by farm operators are expected to dramatically increase over the next couple of years.

Despite all these pressures, farmland prices are holding steady. The numbers released by the Chicago Federal Reserve Bank show that for the seven states in the district, prices are unchanged for the year ending in April. (On a state by state level, it’s not that simple. Prices are down 6 percent in Iowa, but up 5 percent in Michigan and 8 (!) percent in Wisconsin. But even with the wide range, farmland prices are holding up better than a lot of people figured they would.

Obviously, operators are thinking beyond the current crop year, which they should. A farm is a solid business that will provide steady returns over time. In the shorter term, however, farmers are looking to address their liquidity challenges. Many will seek to restructure existing leases. Some, who aren’t in a position to ride out losses over multiple years, will need to consider downsizing by walking away from leases altogether and selling land and excess equipment.

Investors have their own challenges in this market. Right now, existing rental agreements are providing a cushion for many, but this won’t last forever. In the long run, rental agreements have to be set at a level that provides an acceptable return for the owner as well as a healthy cost structure for the farmer. As tenants look to reset lease rates and even potentially walk away, returns are bound to decline and investors may need to reconsider their desire to continuing holding land in their portfolios.

In short, the current marketplace is far more complex and subtle than any we’ve seen in a long time. The answers aren’t easy, and that’s why I recommend that farmers and investors alike consider using professional farm management services. Professionals like John Kirkpatrick and Josh Gerig in our Clarion, Iowa office can provide valuable guidance on a full range of options for riding out the current bump in the market. They can provide expert advice on numerous options, including the sale of land and the renegotiation of leases. You can reach them at 515-532-2878.

Murray Wise Associates LLC provides farm management services as well as financial advisory and auction and private treaty brokerage services, and we’re always glad to hear from those who could benefit from professional advice. Just give us a call at 217-398-6400.