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DAVID KRUSE

By Staff | Mar 14, 2014

Anyone owning farmland is aware that values may back up in the short-term adjusting to reduced net farm income. But I wonder if there is a farm anywhere that has been sold specifically because of that outlook.

Very few people who own farmland trade farmland. They typically only sell it to settle estates and, based on demographics of the age of owners, there will be more land coming on the market sooner than later.

As farm cash flows tighten, mortgage levels on farmland may increase as debt is restructured, but there is a huge pool of equity in farmland today that could be tapped as a source of liquidity if cash flows go into drought.

Farmland has been a phenomenal investment long-term and there is every reason to believe that it will continue to be.

If the long term USDA outlook for grain prices is correct, cash rents will have to fall back in the next couple years, which will trim earnings from farmland investing.

It has been possible to pay the $300 to 400 per acre cash rents when corn margins above operating costs were more than $500 per acre with $7 corn.

The historical corn production margin is near $200 per acre. When we return to that margin, farmers will be underwater on current cash rents. If lower margins are sustained, it will eventually flow through to lower farmland values.

In the 1980s, farmland lost 80 percent of its value. Current fundamentals do not resemble what occurred then, but farmland is a market and markets oscillate.

It was possible to pay too much for farmland and the market will adjust with either price or time. Farmland values could backup less in price than many of the doomsayers now predict, and instead consolidate for an extended period of time.

In the 1980s, the correction was obviously weighted to price, while this cycle. I expect, the correction to take the form of time. That could mean that we may have seen the price high for farmland for many of us in our lifetimes, but the wealth created by the bull market in farmland values will still be there in our estates, too.

From a noted increase in the number of no-sales of farms offered recently, sellers are not going to add to pressure occurring in the farmland market today.

Most farms will be sold to neighbors that already own land in parcels, sized so it will not distort buyers’ average cost.

An Agribank sensitivity analysis found that $4.50 corn and steady interest rates would result in a 10 to 12 percent decline in farmland values from the high.

That would mean that the 80 acres that sold for $14,000 per acre here would re-sell for $12,320.

At $3.50 corn and/or higher interest rates would increase the correction to 20 to 25 percent which would still not be a farm crisis in the 1980s sense.

Virtually no farmers have average land costs anywhere near the recent market values, so the risk in buying more land is diluted by equity.

Back in the 1980s the Federal Land Bank would have loaned 90 percent against a new purchase. That was right before it went broke and the farm credit system required a bailout.

Today, they have a maximum of under $6,000 per acre that it will loan on any farm north of I-80 and is helping borrowers pay the mortgage with the dividends from FCSA profits.

What buyers paid for land above what they could borrow really doesn’t matter as it was their cash to do what they wanted. It did not distort the equilibrium of farm balance sheets with unsustainable leverage.

It typically takes two generation to forget the lessons of the past. That is why I don’t think that we will repeat the ag depression of the 1980s anytime soon. Those who experienced the 1980’s ag depression are still primarily the decision-makers today.

It will be the next generation to learn the lessons.

Old timers tell me farmers thought the farm economy was going to go into the tank after WWII as it haddone following WWI and they were ready for it in 1946.

Instead, the U.S. economy started an extended boom as the world rebuilt from the war.

The 1980s ag depression was unexpected. My oldest son was a kid during the 1980s crisis. I expect that his economic life cycle may be timed more closely to his grandfather’s.

He will see another ag sector meltdown in his lifetime, but not right now.

Dr. Elwynn Taylor, ISU’s climatologist, said the next drought cycle most closely matching the Dust Bowl should occur in 2025. That is when I think the ag economy will experience its next historic bust.

My current plan is to retire in 2023 and my statistical life expectancy is to live to approximately 2030. My oldest son would be 46 in 2025.

He never experienced the leverage of the 1970s. He and his generation would be the ones most at risk of repeating the mistakes of the previous generations.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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