2016: A YEAR OF CHALLENGES OR OPPORTUNITY?
The 2015 agricultural year in the US was less than stellar. Net Farm Incomes as reported by USDA were somewhere around $58 B – ½ of what they were two years ago! Crop commodity prices remain much lower than in recent years and while some inputs costs are dropping (fuel and fertilizer are the primary two) they are not declining as fast as the income has. As we enter 2016 the income picture remains less than rosy, unless a supply issue develops such as a drought or flood in a major production area. Rents are generally lower for 2016, depending on where they were in 2015. Reductions of 5-15% are typical for 2016.
Farmland values started a downward trend in the Corn Belt in early 2014 and this trend continues. The most recent publication from the 7th district of the Federal Reserve Bank shows a decline of 3% from December of 2014 to December of 2015. The Purdue land value survey published back in August shows top quality Indiana farmland decreasing (-5.1%) from June 2014 to June 2015. Halderman sales this winter reflect this trend downward as our results show weak marketplaces with a range of -5% to -15% depending on the area and farm.
The lending community is very cautious heading into this year. Most operators are solid financially, however we hear that some are struggling and therefore this could create more farms on the market for lease and for sale.
Since the 1980’s ag lenders are the best “governor” for the ag community and will continue to keep a conservative approach to their lending in these difficult times.
Here are some developing trends or issues to think about during 2016.
As farm incomes decline versus previous years the pressure on land rents continues. This past fall negotiations for 2016 land rents were some of the most challenging in recent years as farm tenants and landowners struggle with determining the “right” rent for the farm. Farm incomes in the same neighborhood may vary greatly depending on how producers market their grain, their fixed costs (equipment), actual production and if they have crop insurance protecting them. Here at Halderman our 20 farm managers have their hand on the pulse of the rental market and are very capable at assisting you in the rental negotiations. Please call your Halderman representative if you have questions about how to navigate this process.
Land values are softer here in the Corn Belt and we are seeing a 10-20% average decline from the peak two years ago. The stronger areas with good crops in 2015 declined less and the historically weaker areas are struggling more. It is important to remember that we are still in the 80th percentile of the historical price range for farmland. If lower commodity prices persist then further declines in land values over time will occur, maybe as much as 25-30%. The debt structure in agriculture remains solid, but the lower farm incomes are the most significant factor in the land value equation.
If you are considering a farmland investment this downturn may create some better buying opportunities than in recent years. For example farms that sold for $10,000/acre in 2014 might only bring $8,000/acre today. In addition to a lower entry price cap rates may start to increase. Interest rates are low for farmland purchases and there are many fixed rate opportunities. As always the vacancy rate is basically 0% and this is a nice feature when comparing this to other alternative investments.
Why Invest in Farmland Today? Look at the chart below. This shows the number of people moving to the middle class in China, India and the rest of the world over the next 10-15 years. This trend shows a positive long term future for farmland ownership as this will lead to more demand for protein.
If you want to own farmland the next 1-2 years might be an excellent time to jump into the market!!
USDA Farm Program
2014 brought a new Farm Bill from Congress. The sign-up and implementation occurred in 2015 and so far payments went out for 2014 and projected again for the 2015 crop as prices reached low enough levels to trigger. Maintaining the contract and delivering data timely to the Farm Service Agency remains important for landowners. Crop insurance remains an excellent risk mitigation tool for landowners and tenants.
In conclusion, the market changed in 2014 and we are in a declining land rent and land value trend. If you are contemplating a sale during the next five years consider:
- Farmland is in the 80th percentile of historical values and may trend lower near term due to declining incomes and rising interest rates.
- Farm cash yields will be lower than in the past five years.
- Interest rates are still low, but increases are predicted in the coming months. Increasing interest rates might a negative to farmland values.
It is my belief that the low commodity prices are stimulating demand across the globe and the long term fundamentals for agriculture remains bullish as production must increase to meet the rising demand for food. For example, the US cattle herd is expanding for the first time in many years due to lower feed costs and better pasture conditions. This correction is appropriate following the run we’ve enjoyed and in response to the decline in farm incomes. If you have any questions related to your farmland investment please call the Halderman main office at 800-424-2324 or your local representative.