Tuesday, March 15, 2011

Farmland Prices: Have We Reached the Top?

The current writing from Daryll Ray and Harwood Schaffer out of the University of Tennessee's Agricultural Policy Analysis Center expresses their concern about the current high farmland prices. I often find myself strongly agreeing with what these two men have to say and this time is no exception. I have been continuously concerned by the high input costs this season, fearful that commodity prices won't be so high when it comes time to sell. Why is it that everyone else seems so assured of guaranteed rising agricultural commodity prices right now?
K. McDonald

To follow, is the conclusion of their article:

Average grain prices, adjusted for inflation, are nearing the giddy levels they reached in the late 1970s, the peak of the last disastrous boom-and-bust cycle for agricultural land. That has regulators worried."

It has us worried, too. As in all things financial, timing is everything. Those who bought land near the bottom, likely have little to worry about, while those who buy near the top could be in trouble if crop prices plummet and land prices follow. It is true, that the current interest rates and the loan-to-asset ratio are favorable, leaving farmers in a different situation than they faced in the 1980s. That being said, much of that asset value is in land and if land prices drop, the loan-to-asset ratio deteriorates quickly.

In both periods, as prices climbed to very high levels so did input costs. In our discussion with farmers, it would not take much of a fall-off in prices, to put their balance sheets in the red. And it is hard to pay on loans with a negative cash flow. That bring us to some discussions we have had recently. About a month ago we were talking to several leaders of an NGO (non-governmental organization) involved in farm issues and they asked us about farm foreclosures. They said they were hearing stories of farmers going into foreclosure because either the farmer of the spouse had lost their job in the current recession. Without the off-farm income, they were drawing their household living expenses from the farm, leaving no money to service the farm loans.

At a recent farm meeting, one of the speakers had to cancel because he was due in court. He was representing two very large farmers in bankruptcy proceedings. An auctioneer quoted in the New York Times article said that with prices rising so quickly, "'it's getting scary.'" We agree.

source: Land prices are up, up, but let's hope not away-like a bubble [pdf]

1 comment:

  1. Do we know if this price increase is being driven by supply or by demand? Are there as many land transactions now as the historical norm? Or are there fewer farms for sale? I think it will turn out less badly if it's a supply issue rather than demand. There may be a pool of buyers who are just not willing to commit at these prices but will step in if things cool off.