Worried about the drought? Focus on the long-term basics

It wasn’t so long ago that we were all feeling downright euphoric about the 2012 crop season. A mild winter had ended early, enabling many farmers to get their crops in the ground early. Worldwide demand was (and still is) continuing to grow, and everything pointed to a year to remember.

Unfortunately, it seems to be turning into one of those years in which Mother Nature teaches us some lessons in humility. For all our advances in technology and farm management, we can’t make it rain, and we are now in a drought that is being compared to the one we had in 1988.

Naturally, farmers and landowners throughout the nation are wondering how this will affect the value of their land. Most of us are sitting on land that is worth a great deal more than it was a few years ago, and we don’t want to see our wealth deteriorate.

Will the drought hurt farmland prices? In a rational market, it shouldn’t have major long-term impact. Droughts are a fact of life, and anybody who doesn’t understand this has no business owning farmland. In other words, the occasional drought should be factored into the prices at any given moment. At the same time, we have to remember that even the market for farmland isn’t always rational. Just as a bull market in equities attracts a lot of new investors (aka speculators) who can’t conceive of a bear market, the bull market in farmland has attracted some investors who may not have fully discounted the reality of drought. At the same time, it’s important to remember that about three-fourths of the land selling in the past year or so has gone to farmers, who know a thing or two about our dependence on the weather.

So what’s the best response to the drought we’re seeing? As usual, I advocate focusing on the long-term basics. First, keep an eye on your costs and overhead. Right now, farmers are in the enviable position of having historically low debt, and that puts them in a stronger position. But it’s always a temptation to upgrade machinery and take on additional costs that may not pay for themselves in improved returns over the intermediate term, especially when revenues take a beating. The farmer who keeps a close watch on his leverage will always be in a stronger position.

Second, consider diversifying. If your entire investment is in one type of land, or one geographic area, you’re tied to that particular market in terms of weather, demand and numerous influences. That’s great if you’re in the right place. But when the weather and markets don’t cooperate, you’re vulnerable. We all have our comfort zones, but even if you’re married to corn and soybeans, it doesn’t hurt to spread your over a wider geographic region, including the plains states. Wheat, cotton and peanuts — as well as potatoes and other vegetables —  can offer excellent diversification and opportunities with the right management.