December 6th, 2013
Whenever I talk with people about the benefits of owning land, I invariably stress that they should view farmland as a long-term asset that you buy and hold onto (at least 10 – 20 years), not buy and flip like you might stocks or bonds. Yet, I never really thought about how long some families actually do follow this strategy. An article that was recently posted on the University of Illinois farmdocdaily web site (Number of Generations a Farm Has Been In a Family) discussed this very topic citing research from a survey of farmland owners in 2001 (though this information may seem somewhat dated, it’s doubtful that the results would be any different today than they were 12 years ago).
I found it interesting and somewhat surprising that nearly 40% of the farms in this survey had been in the same family for three or more generations. If a generation is considered to be 25 years, then that means that a significant portion of the farms in this country (or at least the 26 states surveyed) have been in the same family for at least 50 years, if not more. At first, that seemed like a really long time until I stopped to think about some of the properties that we auctioned this fall… a farm in Douglas County, IL had been in the same family for over 100 years; a farm in Montgomery County, IL for over 150 years; and another three Illinois properties could claim at least 100 years each. And even in my own family, we have had one farm since 1866 and another since 1876. Now that I’ve thought about it, maybe the three-generation fact from the survey doesn’t seem that far-fetched after all!
So what are the catalysts that contribute to the sale of a multi-generational farm? From my experience, I’ve seen two forces come into play: 1. The current owners no longer have the emotional tie to the land like their ancestors had. To them it’s simply an asset that can be converted to cash; or 2. The ownership interests get so divided that it no longer is economically feasible to continue holding on to the farm. When the 80 acres that Grandpa bought are now owned by 30 people, it probably makes sense to sell and move on.
Being able to keep a farm within the same family is an impressive feat, given the fact that many beneficiaries today simply want their interests converted to cash as quickly as possible. But when that does happen, we can only hope that one of the other heirs has the financial resources to buy out the disinterested parties so the ownership legacy can continue.
November 22nd, 2013
As we’ve seen the past few years (especially in 2012), crop insurance plays a critical role in providing income protection for farmers. One of the key variables in determining both the premiums paid and the revenue guarantees is the price level set in the policy. Though the actual prices for the corn and soybean insurance contracts won’t be determined until February, based upon current commodity prices it’s readily apparent that next year’s rate for corn may be over a $1.00 a bushel less than in 2013, and a $1.50 less than in 2011.
So why are these rates so important? To an extent, they help set the floor on profitability for farmers. If the floor is above the cost of production as it has been for the past 3 years, then farmers have some assurance that the crop year will be profitable. (As might be obvious, however, the cost of production will vary from producer to producer and there is no insurance that can protect the bottom line of a farmer who pays too much cash rent.) But it’s not just farmers who are closely watching the insurance guarantees… lenders are as well. Many lenders have already signaled that they will be more conservative in 2014, and that they will likely be parting ways with some of their high-risk borrowers. This in turn means that supplier financing will increase, which places more of the financial burden on the fertilizer companies, et al who furnish the inputs that farmers use. In other words, these rate guarantees can have a profound impact on many in the industry, not just those planting and harvesting the crops.
More information on this topic can be found by reading a recent article posted on the University of Illinois farmdocdaily web site > (Lower Crop Insurance Guarantees in 2014). Realistically, the purpose of crop insurance should be to protect farmers against a catastrophic event, and not necessarily to guarantee a profit every year. However, the program can have a direct impact on landowners as well, specifically as it pertains to cash rents and land values. How much of an impact is unknown, though we may well get to see in the next few months.
October 17th, 2013
Over the past few years, record commodity prices have generally received the most credit for driving land prices higher… and deservedly so. Higher grain prices led to higher profits, which in turn led to more capital purchases. The other important variable that historically has had a large impact on land prices, interest rates, has received some recognition for contributing to the explosion in land prices, but probably not quite as much as it deserves. And in my opinion, interest rate decisions at the federal level may be the foundation that keeps farmland prices reasonably stable for the foreseeable future.
A recent article posted on the economist.com website (The New Head of the Federal Reserve – Dove Ascendant) discusses the policies that the Federal Reserve Board (and in particular Ben Bernanke, the chairman) has implemented since the economic recession in 2008. The biggest concerns of the Fed during this time period have been slack economic demand and high unemployment. Their response has been to lower interest rates with the hope that economic expansion will increase consumer spending and spur new job growth. The success of this strategy has been debated ad nauseam, but in reality some individuals have been negatively impacted, (e.g., those who invest in conservative instruments such as C.D.s) while others have benefited. The impact on farmland prices have been positive for two reasons… lower borrowing costs mean that buyers can afford to pay more for land, and lower returns on alternative assets have driven individuals and institutions to invest in farm properties. Their motives are the higher annual cash returns, and the potential for capital appreciation.
With the recent drop in commodity prices, it now appears that the pressure is on interest rates to help soften any correction in the land market that might be on the horizon. Fortunately, help may come in the form of President Obama’s decision to nominate Janet Yellen to head the Federal Reserve. Ms. Yellen’s past decisions would indicate that the Fed will likely maintain their low interest rate policies once Bernanke retires in February, which can only be seen as a positive sign for land prices.
Only history will tell us if the low interest rate strategy had the desired impact on the U.S. economy. But in the interim, this philosophy should certainly benefit those buying or owning farmland.
October 10th, 2013
In recent years, China has purchased large tracts of farmland in other countries. The motives given for these acquisitions vary – to ensure a steady food supply for their ever-growing population, to diversify their foreign investments, or to try and take over agricultural production in other parts of the world. Many countries have reacted to their buying spree, especially in South America where new restrictions are now in place to limit what outsiders can own. However, China has recently come up with a new approach for guaranteeing a steady inflow of agricultural production from beyond their borders – the long-term lease.
In a recent article posted on the nationalgeographic.com website (Why China Wants (And Needs) Foreign Farm Land), author Dan Stone discusses a lease arrangement that the Chinese government signed with Ukraine. The agreement covers 3 million hectares (almost 1/20 of all the country) and runs for 50 years. The annual payment – $2.6 billion dollars.
In theory, both countries should benefit from the pact – the Chinese have acquired a new source of food production for their people, while the Ukrainians will benefit from both the annual payments and the infrastructure that the Chinese will be building to support their agricultural venture. Yet, Stone also raises the counter-argument that any land leased by China in the Ukraine will be used to feed the Chinese people, and not the Ukrainian. However, you would assume that the Kiev government took this fact into consideration during their negotiations.
Regardless of which side of the argument you agree with – it’s a win-win for both countries, or it’s just a new form of colonialism where one country eventually takes over another – you have to give credit to the creativity of both nations. Only time will tell if this creativity will yield true benefits for all the parties involved.
October 2nd, 2013
Recently, the National Agricultural Statistical Service (NASS) released a report that detailed 2013 farm rents on a county-by-county basis. The information was gathered by surveying farmers and others in the industry that would have an intimate knowledge of the current rental market. The NASS collects this data for several purposes – to guide farmers in determining rental agreements; to assist economists in studying research questions; and to aid policy makers in computing payment rates for the Conservation Reserve Program. However, an admittedly major concern with the county level survey is its accuracy due to the relatively small number of individuals responding in each area.
Some of the more interesting findings were discussed in an article published on the University of Illinois farmdocdaily web site > (2013 County Cash Rents). DeWitt County in Central Illinois had the highest cash rent in 2013 at $385 per acre while Johnson County in Southern Illinois was lowest at $69 per acre. As could be expected, the heart of Illinois where you have the highest percentage of flat, black prairie soils also had the top rents.
The authors also compared the NASS rent survey with a similar survey done by the Illinois Society of Professional Farm Managers in August. Across all the different land productivity classes, cash rents on managed properties averaged nearly $75 per acre more than the NASS average. This seems to indicate that having a professional manager or consultant oversee a farm can add more money to a farm owner’s bottom line at the end of the year.
As is often discussed on this blog, landowners must remember that no two properties are alike and that the average rent for the county may not directly reflect a fair rent for a particular farm. The average number can be used as a starting point in negotiations, but adjustments should be made for soil productivity, % tillable, commodity price outlook, drainage, fertility, ease of farming, and especially the current rent being paid relative to other farms in the intermediate area. If the lease amount is already well below market levels, then increasing the rent in a down year may still be prudent.