Reflections on Federal Reserve Ag Conference

I had the great honor this week of serving as keynote speaker for a prestigious gathering of farmland owners, academics, policymakers and other leaders at an agriculture conference sponsored by the Federal Reserve Bank of Chicago.

Naturally, there has been a lot of debate recently over whether farmland prices have reached unsustainable levels, and there were certainly differing opinions among speakers and attendees. I remain bullish on farmland, as I have been consistently over the years, but it’s both healthy and necessary for us to have this debate.

Among other concerns, some are worried that commodity prices — currently extremely high due to this year’s historic drought — might drop precipitously and bring land prices with them. I can’t rule out the possibility that a decline in corn or soybean prices could create some air pockets. In fact, I told the group in Chicago that we need to be prepared for more volatility in both. Still, with world supplies of corn and soybeans at record lows and with demand from China and the rest of the world continuing unabated, I see these as short term.

Longer term, worldwide trends still point toward stronger growth, with China continuing to show a virtually insatiable demand for American farm products — not only corn, but also soybeans, beef, pork and alfalfa, among others. It’s easy to forget that up until 2007-2008, China was a net exporter of corn! Today they are a major importers of corn!

Some folks have worried that recent weakness in China’s economy might hurt demand, but they forget that it reflects a significant change in Chinese lifestyles (today’s average Chinese consumes more than 80 pounds of pork per year, versus about 20 pounds in 1979). Such lifestyle changes don’t tend to be reversed by economic ups and downs. In addition, China’s farming operations are woefully inefficient compared to those in the U.S. , making it extremely difficult for them to catch up.

American farms, meanwhile, are a model of efficiency, and while it’s true that land prices have risen significantly in the last couple of years, the underlying data reflects a marketplace that shows relatively few signs of speculative excess.  Three-fourths of the farmland in Iowa is debt free, and two-thirds of the farmland selling in Illinois is still going to farmers. For every $100 in assets, farmers now have only $9 in debt, compared to $22 in the 1980s. In addition, the supply of farmland being placed on the market remains very tight — typically 1 percent or less being sold each year.

When you combine that with the remarkable long-term profitability of farmland as an investment, I think it’s a great value even at today’s prices. Since 1994, farmland in the U.S. has provided returns of 11.5 percent annually, with volatility rivaling that of corporate bonds and treasury bills. Even with the record drought of 2012, farmers emerged in good shape thanks to crop insurance and strong commodity prices.

One topic that came up during the Federal Reserve conference was that of rent prices, which have been increasing sharply in some recent cases. That concerns me a bit, because while farmers are doing quite well, high rents can significantly impact profitability. As we always have, we’re advising our farmer clients to look at the bigger picture and pay only what is economically feasible in their specific operations.  One of my fellow presenters at the conference, Jim Farrell, has said that the biggest risk to farmers is high input costs and not land values – an opinion of which those of you who follow this blog and our newsletter know I absolutely agree with.