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Soft Landing, No Crash

January 29, 2014
By: Ed Clark, Top Producer Business and Issues Editor
Flying Money

No 1980s redux, but time to rein in costs

While crop prices have done a 180-degree turn and land values and rents might edge lower, 2014 will usher in a period of moderation—not a crash.

"We’ve been in boom times, but there won’t be a bust out of this," predicts Mike Boehlje, a Purdue University ag economist.

Still, farmers should anticipate a correction. "This is not a crash like we had in the 1980s when we saw a 50% decline in land values," he says.

Michael Langemeier, also a Purdue University ag economist, says he expects cash rents to decrease 10% to 15% and land values to drop 15% to 25% for the next three years.

"Land values will fall faster and harder than cash rents because land prices went up at a faster rate," says Langemeier, noting that Indiana land values increased 10% per year from 2000 to 2013, and rents jumped 6% per year. "That’s unprecedented."

Economists think this correction should be more like a soft landing. "Land is a real bond," Boehlje says. "When interest rates go up, Treasury bonds and land go down."

Based on Federal Reserve Board statements, T-Bond interest rates will double from 2012 to 2016, going from 2% to 4% to 5%.

"Today, interest rates are about 5.5% for operating loans and 4.5% for land," Boehlje says. "It wouldn’t surprise me if rates are 7% to 8% within three years." That’s still half of what they were in the 1980s, and are just back to historical averages.

Even so, calculations show that some producers need to employ aggressive strategies to reduce their vulnerability. With all costs included, breakeven for corn is about $5 per bushel, according to Indiana data.

"Futures markets tell us to get costs down to $4.50 or lower," says Chris Hurt, a Purdue ag economist.

Breakeven for soybeans is $12, but Hurt says farmers need to be in the $11 range. For the next three years, he expects $4.50 corn, $11 soybeans and $6 wheat. Corn margins might have compressed by as much as $2 per bushel during the past year.

For farmers who want to better position themselves for this compression, Boehlje advises: locking in margins with more pre-selling, buying higher levels of crop insurance, fixing interest rates on long-term debt, paying off debt, holding financial reserves, slowing down growth and funding expansion with more equity than debt.

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