The Housing Bubble

A report from the Corn and Soybean Digest. “One critical aspect of this economic downturn in agriculture is the possibility of increased risk with larger farms. The financial plight of many larger producers is not measured by acreage or livestock numbers, but by farm net income. My good friends at University of Minnesota’s Center for Farm Financial Management provide excellent analysis of their FINBIN database. The main concern for lenders and regulators is the concentration of debt with fewer producers. Data suggests that 10 to 12 percent of U.S. farms and ranches carry 63 percent of farm debt, which has increased dramatically in recent years. Many of the larger farms have significant equity in the form of farmland. However, even strong equity does not change the fact that only profits and cash flow pay the bills, not dirt.”

“According to FINBIN data on 2015 net farm income of larger operations, both crop and livestock, there may be a possible blowout looming. In the database, all farms with more than $2 Million in gross revenue generated a median net farm income of just over $126,000. The top 20 percent of farms generated slightly over $579,000. However, the median net farm income for the lower 20 percent was $-332,000. Losses of this size are unfortunately, sometimes an ugly reality of larger operations.”

The Farmers Exchange. “Grain farmers and agriculture businessmen and women gathered last Wednesday for the annual Pinney Purdue Field Day at the Pinney Purdue Agricultural Center in Wanatah. More than 150 individuals attended the event to listen to educators and specialists about corn, soybeans and other topics that farmers are dealing with. Jason Henderson, associate dean and director of Purdue Extension, gave his answer to the question, ‘Will the cash crunch in agriculture turn into a farm bust?’”

“In discussing this, he referred to the tough times that agriculture and farmers dealt with during the 1970s and 1980s, and that many farmers today are feeling some of the same rhythms from that time. ‘We are on the downturn now, we’re filling the cash crunch, but will this turn into a bust? In my opinion, I think the answer is no. I don’t think the farm economy is going to go bust if agriculture remembers the biggest lesson of the 1980s: Don’t leverage the farm,’ said Henderson.”

From Agriculture.com. “With $3 corn and $9 soybeans, it’s easy to see why farmland values are declining. But don’t take our word for it. There are scads of reports from industry experts. In the Washington County, David Klein, managing broker and auctioneer with Illinois-based Soy Capital Services says farmers bought most of the tracts. This continues to be the case in most sales, although we’re seeing more investor action in some of the sales we’ve tracked. ‘People are trying to make the case that outside investors are propping up land values,’ says Steve Nicholson, analyst with Rabobank Financial. ‘However, farmers are still buying the majority of the land. Are there outside investors? Yes. But it’s not the majority.’”

“Farmers are facing tougher times for the foreseeable future. ‘The majority of the farmer-buyers are using some form of leverage, and we are watching that closely,’ Klein says. ‘Farmland will not cash-flow when you borrow too much money. We like to get three quarters of the purchase price as a down payment, either with cash or pledging more farmland.’ The mid-year survey conducted by the Illinois Society of Professional Farm Managers and Rural Appraisers, released September 1, suggests that 80% of the farmland sales conducted in that state so far in 2016 featured some sort of borrowing.”

“For farmers, financial stress is setting in. ‘Farmers are illiquid. They need cash to pay the bills. We’ve seen some farmers sell land to generate cash, and we expect we may see some more of that this fall,’ Nicholson says. If raising cash is necessary, this strategy makes some sense. ‘Would you rather sell 600 acres now and right the ship a bit, or wait two to three years down the road and lose the whole business?’ Nicholson asks. ‘I’m trying to get folks to think a bit differently.’”

The Des Moines Register. “Getting started in farming has always been difficult, but the recent collapse in corn and soybean prices makes it that much harder, experts say. Corn and soybean prices are as much as 60 percent below their peaks in 2012. It’s an important issue in Iowa, an ag powerhouse. The state had about 132,000 farmers in 2012, 4,500 fewer than five years earlier, mirroring declines in the number of farms, based on the 2012 U.S. Agriculture Census. They’re also getting older, with the average age of farmers climbing nearly five years to 57 over 15 years.”

“‘In this environment, it’s tough to be a beginning farmer or an experienced farmer when production costs exceed revenue,’ said Steve Bruere, president of the Peoples Co., a farm management and real estate brokerage in Clive. ‘It’s tough for everybody.’”

From Radio Iowa. “Rex Wilcox, a farm management specialist with Stalcup Ag in Storm Lake, says after three years of losses, operators need cash rent concessions to shrink operating costs. Income has been falling, he says, while input costs remained steady. ‘Farm operators are in a position financially where they’re looking for the rents to come down,’ Wilcox says. ‘In some cases, their loan officers are putting pressure on them to have the rents come down. The cash flow is just not there anymore and they have to have some break on the rental rates.’”

“Wilcox says some landowners have been adjusting rents downward the last few years with lower commodity prices. However, with a bumper crop expected and corn prices very low, they may need to lower rents again for the year ahead.”

“‘We’ve seen some decreases of around 10% since 2013,’ Wilcox says. ‘So, 2014 was 10% less than 2013 and 2015 was 10% less than 2014 and it might take that kind of decrease to make things work again.’ Many multi-year leases will expire this year, which may mean some ground will see new renters. He’s also hearing about some operators trying to break long-term arrangements.”

“‘I think you’re going to see more terminations of farm leases by operators this year than we’ve seen in a long time,’ Wilcox says. ‘That’s the indication I’m getting from talking with attorneys. They say they’re doing a lot of business with farm operators that are coming in and asking to produce a termination to send to their landowner.’”

From Beef Magazine. “A new report from Rabobank says farmland rent values must drop to meet lower commodity prices and it’s highly probably all land values will fall, too. ‘If rental costs remain sticky at unsustainable levels through the 2017-18 growing period, individual land assets face the threat of much deeper devaluation, as nutrient and crop protection programs are cut and abandonment (usage changes) increases,’ says Sterling Liddell, Rabobank Food & Agribusiness Research and Advisory service analyst.”

“Even with a decline in rental values, farmland acreage contraction will still likely be needed before commodity prices reach a sustainable level in the long term, Rabobank analysts say. This should mean a return to grass and forage crops. To balance supply and demand at a sustainable breakeven price, Rabobank analysts estimate that 3-5 million acres will be forced out of corn, soybean and wheat production over the next three years. This is about a 2% decline from the five-year average of total farmland.”

From Bloomberg. “Total farm debt in Canada, the world’s largest canola grower and one of the biggest wheat exporters, will rise at a slower pace in 2017 as gains cool for the value of agricultural land. Canadian farmers took on more debt in the past 15 years as low interest rates prompted them to buy more land as incomes soared. Between 2001 and 2015, farm debt jumped by 126 percent and the value of farmland rose by 211 percent, according to the report. Now, cooling gains for land, which accounts for about two-thirds of farm assets, may make growers more hesitant in taking on loans, especially amid a prolonged slump for commodity prices.”

“Land values are ‘clearly coming down, and that is going to have an impact on farm debt,’ J.P. Gervais, the chief agricultural economist at Farm Credit Canada, said in a conference call before the report’s release.”