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June 2011 Archive for Your Precious Land

RSS By: Mike Walsten, Pro Farmer

Mike Walsten has covered major business trends in agriculture for more than 40 years.

KC Fed Bank Warns Of Potential Debt Problems In Agriculture

Jun 27, 2011

Mike Walsten

There may be a potential "debt bomb" sitting under the farm land market. That bomb isn't debt on farmland itself but the concentration of non-real estate debt in the hands of young operators (under the age of 35) and large operators (operations with more than $1 million in farm sales). This is according to an analysis of farm balance sheets conducted by Brian Briggeman, an economist with the Federal Reserve Bank of Kansas City.

The research points out that while agriculture's debt-to-asset ratio is near record low levels, the concentration of debt into these two groups poses a potential risk for agriculture and farmland values. "On average, large farms' total net worth is more than five times the net worth of small farms, primarily due to a larger investment in non-real estate assets. Still, large farming operations are more leveraged. On average, large farm's debt-to-asset ratios are about 30%, which is 5 percentage points higher than small farm's debt-to-asset ratios, he writes."

Briggeman also points out: "The net worth of farm enterprises with younger operators is about half of their more established, older counterparts. In addition, the debt-to-asset ratio for farm businesses operated by younger producers is nearly 15 percentage points higher than their more seasoned counterparts. Thus, of all producer types considered, large farms and farms operated by younger producers with debt are most susceptible to financial stress. The debt-to-asset ratio on farms with a younger operator averages close to 40% -- a level that has signaled significant insolvency risk in the past.

"In addition, these producers have a higher concentration of non-real estate debt," he continues. "For large farming operations and those operated by younger farmers non-real estate debt averages about 20% of total farm debt, compared to less than 15% for both small farm operations and those operated by more experienced farmers."

So what's the impact if land values drop by 10% in a single year -- the steepest one-year decline in land values during the 1980s farm crisis? Briggeman says the impact on debt-to-asset ratios and farm net worth "would be fairly uniform and modest across most producers." His research indicates the debt-to-asset ratios would rise only 1.5 percentage points for large and young operators. Net worth for all producer types would decline 7%. "As a result, a 10% decline in land values would only slightly heighten insolvency risk," Briggeman says.

But what happens if farmland values decline 50% like they did through the crisis of the 1980s? The impact is tough on all producers, as you'd expect. "On average, producers would lose 35% of their net worth, dropping producers' net worth to 2004 levels," he says. "Overall, debt-to-asset ratios for the farm sector would rise anywhere from five to eight percentage points. Financial stress would be most severe for producers with relatively more non-real estate debt. Large farming operators and younger operators with significant levels of non-real estate debt could see their average debt-to-asset ratios reach a dangerously high 40%. The number of large farmers facing insolvency could more than double and the number of young operators could quadruple."

Implications? Obviously if you pile up debt while net incomes in agriculture are rising, you're going to be in trouble when the cycle turns. As we've been telling LandOwner subscribers, use the current period of strength to pay down debt, increase working capital and lock-in long term interest rates.

Click here for the full report.

If interested in seeing a copy of LandOwner, just drop me an email at landowner@profarmer.com or call 800-772-0023.

South Dakota Land Values Surge 16.5%

Jun 24, 2011

Mike Walsten

The value of South Dakota agricultural land rose 16.5% in 2010 reports the annual South Dakota State University Farm Real Estate Market Survey. The surge is the third highest annual rate of increase since 1991, say report authors Dr. Larry Janssen and Dr. Burton Pflueger. From 2001 to 2008, ag land values in the state rose more than 10% each year, including more than 20% in two years (2004 - 2005 and 2007 - 2008). From 1991 to 2000 and from 2008 to 2010, annual increases varied from 4% to 9%.

The survye found the value of cropland posted the strongest percentage increase, which increased statewide by 17.7% compared to increases of 15.2% for hayland and 13.1% for rangeland. The strongest increase in land values (about 15% for most land uses) occured in the east central, southeast and south central region.

Click here for the full report.

If interested in seeing a copy of LandOwner, just drop me an email at landowner@profarmer.com or call 800-772-0023.

Is Some Air Going Out Of The Farmland Market?

Jun 17, 2011

Mike Walsten

Creighton University Economist Dr. Ernie Goss thinks some air may be slipping out the farmland market. He makes that observation after looking at the decline in the farmland price index component of his Rural Mainstreet Index (RMI). The RMI is a survey he conducts monthly of ag bankers in non-urban agriculturally and energy-dependent regions within 10 upper Midwestern states. States surveyed range from Colorado to Illinois and North Dakota to Kansas.

The farmland index slipped to 62 in June, down from May's 75 and April's 77.6. One year ago, the index stood at 54.7. The farm equipment sales index edged lower to 63.1 compared to 65.9 in May. "We are beginning to see some of the air exiting the farmland price bubble," states Goss. "In my judgment, this is not a bad outcome. A significant upturn in the value of the dollar stemming from the European debt crisis could drive the dollar higher and agricultural commodity prices Lower. This would weaken farm income growth and take even more of the air from the bubbles we have been seeing in farmland and farm equipment sales," says Goss.

Click here for his full report.

If interested in seeing a copy of LandOwner, just drop me an email at landowner@profarmer.com or call 800-772-0023.

More Bubble Talk -- Farm Debt May Be More Of a Problem Than Thought

Jun 10, 2011

Mike Walsten

The level of debt held by farmers may be more of problem for future land values than previously thought if farm incomes drop sharply or interest rates spike, argues Nick Paulson at the University of Illinois. He looks at the argument that the current run-up in farmland values is not the same type of bubble as seen in the 1970s due to the low relative level of debt held by agriculture. He suggests that while that may be true, the absolute level of debt has still surged sharply and that high level could still prove a problem if incomes should drop and/or interest rates rise.

Click here to read his article "Farm Debt and the Farm Real Estate Bubble."

If interested in seeing a copy of LandOwner, just drop me an email at landowner@profarmer.com or call 800-772-0023.

Now Time Magazine Is Talking About Investing In Land

Jun 02, 2011

Mike Walsten

The lure of farmland has even caught the attention of Time Magazine (click here). I don't know whether that's a good thing or a bad thing. Usually when we see something about ag markets being written about in the consumer media, it hints the end may be near for the move. Could that be the case here? Don't know. We've sure seen plenty of stories in the consumer media in recent years and farmland values continue to rise -- driven by rising farm profits. When profits slide, the rise in farmland values will end, too. So far, profit prospects look very promising. That's based on what we know today and assuming there's no global economic meltdown prompted by a Greek/Euro contagion.

Check out the story, "America's Hottest Investment; Farmland," yourself here.

And here's an interesting item about Ukraine opening up the sale of farmland but deciding not to let foreign investors in.

If interested in seeing a copy of LandOwner, just drop me an email at landowner@profarmer.com or call 800-772-0023.

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