As farmland values continue to rise, are you prepared for the implications? Obviously, land will cost more to buy or rent. What about factors that could push prices even higher and change farming as we know it?
Outside investors are one variable to keep an eye on. Rising farmland prices will draw their attention. Just this spring, Warren Buffett said, ”If you gave me the choice between all the farmland in the country, stocks like Exxon Mobil, or gold, I’d choose the stocks and the farmland.” It’s no wonder he likes farmland. Corn Belt farmland increased 16 percent in the first quarter of this year, the biggest jump in 32 years, according to a report from the Chicago Federal Reserve Bank.
While the report also states that famers—not outside investors—have been the biggest buyers thus far, investors go where the money is. If they play a role in bidding up land even further, you will need to earn ever more money to remain viable. In short, those in positions of financial strength will grow stronger, pushing out those who aren’t as financially fit.
Farmers are able to purchase higher-priced land right now because commodity prices are trading at or near all-time highs, and the present-day profit picture looks extremely good, according to the Fed. In the debt department, loan repayment increased and loan extensions decreased in the first quarter.
If higher commodity prices are the norm, as some market observers believe, the near future for farm profitability could continue to look good. Yes, input costs are up but not dramatically. The cost of producing a bushel of corn has risen approximately 17 percent over the past year while the current price offered for new crop corn has risen approximately 70 percent.
Allow me to pause and repeat something I’ve said before in one form or another: Continued market volatility will create opportunities and risks. Unfortunately, many producers will miss attractive pricing opportunities due to complacency with their marketing. That’s what high commodity prices can do . . . lull you into believing and hoping they will remain high. That’s why it’s so important to be well-positioned with your marketing.
With land prices already at all-time highs, there’s talk of a bubble and of prices being near a top. I can absolutely say that talk is wrong. I can see Corn Belt farmland values doubling or tripling before coming down significantly. If this were to happen, it could fuel a tipping point toward foreign or institutional ownership of farms. That’s because farmers aren’t getting younger. According to the USDA 2007 census, most farmers fall into the age range of 45 to 64. Farmers 65 and older are the fastest-growing group.
The kids of American farmers aren’t following in their parents’ footsteps. They’re gravitating toward other careers. Many will work in agriculture; just not on a farm.
When today’s generation of farmers passes away, I expect many of their children will sell the land. Who will have the means to purchase it at $10,000 or even $30,000 per acre? The wealthy and powerful.
Foreign- or investor-owned farms, and the very largest of independent farms, will have cost structures and economies of scale that will eventually force smaller, unprepared producers out of business.
This is the reason I encourage you not to get complacent. Enjoy high profits, yet know that prices will remain volatile. Markets go up and down. Great profits are followed by losses.
Embrace market volatility and the profits that are offered. View it as opportunity. Build yourself a financial cushion so you can afford land and land rents, and hold on to all that you have worked so hard to build up!
Scott Stewart is president and CEO of Stewart-Peterson, a commodity marketing consulting firm based in West Bend, Wis. You may reach Scott at 800-334-9779, email him at email@example.com.
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