John Phipps Revisits “Dirt Is Destiny”

February 11, 2019 05:00 AM
 
Grain farmers have much to be concerned about, but there is scant evidence permanent, enormous farms will emerge anytime soon. This is good news and bad.

Edgar, ILEighteen years ago, I wrote a column (below) questioning the over-used maxim “Cash is King.” My assertion was cash has many advantages over other assets like land, but for farmers, dirt was destiny, that is, a more powerful tool to secure a desired future. Obviously, it had little lasting impact, since the phrase remains a staple of financial advisers and ag economists.

Last year, my county Farm Bureau (Edgar, Ill.) marked its 100th anniversary. As part of the commemoration, a special edition of the county plat book (traditionally sponsored by Farm Bureau) was published. In it were juxtaposed the most current land ownership maps and the oldest previous map on file for our county, circa 1920. It was a sentimental, but simultaneously revealing comparison across pages and a century of time.

As I idly scanned the plats for my township, Prairie, I slowly realized my hunch about dirt and destiny was closer to reality than I ever imagined. Further crude analysis produced even more curious conclusions.

1920:

1920 Prairie, IL Township

 

2018:

2018 Prairie, IL Township

This is inductive reasoning at its finest and faultiest, of course—drawing from one specific example inferences about the nature of farmland everywhere in the U.S.—but it does seem to support some other more robust economic analyses. For example, the USDA Economic Research Service (ERS) recently released a study on consolidation in agriculture.

First, the ERS noted that one sector in agriculture had been resistant to consolidation: cow-calf, and that grain farms were merging slower than livestock. I have no idea what is going on with cattle producers but glancing between my two township maps led me to conclude why grain farms have not, and likely, will not see the speed of consolidation now dominant in hogs, cattle-feeding, poultry, and produce. Farms operations may be regulated by the size of land holdings. Until ownership consolidates, operations can’t consolidate for any length of time. They also reach efficiency barriers as tradeoffs between machinery size and field size, road time and field time, labor and automation, and other management constraints accumulate.

In 1920, I counted 268 separate tracts in my township. In 2018, there were 247. (To be fair I did not count the tiny slivers that were unreadable on either map). In other words, in over 100 years there was little or no land consolidation. This seems reasonable. While relatively large holdings were amassed during a successful farmer or owner’s lifetime, the farm rapidly split into smaller parcels at death. This churning from gathering and dispersing continues today.


Farmers tend to build real estate sand castles, subject to the tides of offspring.


As pointed out in Prairie Patrimony by Sonja Salmon, the most frequent cause of family farm disappearance from the maps is lack of heirs, even more than economics. This creates a tricky tradeoff: have many children to insure there is a qualified heir and then risk the farm broken up by siblings or ideally have one child who holds the farm together but without a backup heir. Few if any farm parents thought this way even after modern birth control, but the dichotomy still is real. Most of us struggle with only-child envy as a result, at least until we are parents. Looking at the constant churn in my neighborhood you suddenly realize landowners in the Middle Ages were more practical than unfair in making primogeniture (oldest son inherits all) customary or even required by law. It was and remains the single most efficient way to accomplish the debatable goal of keeping large landholdings intact. By modern standards it is unthinkably misogynistic and inequitable, but it was firmly entrenched by the Napoleonic Code, widely practiced by European cultures, and still the law until 1925 in England.  

But then my winter idleness prompted another estimation. Drawing on memories of neighbors and my own, I looked at family persistence in farming operations. The results showed that a large majority (~70%) of the approximately 22,000 acres in Prairie Township are still owned or operated by direct descendants of people on the 1920 map (including surrounding townships). I suspect the share is much higher, but my task force became vague on maiden names and too many people named “Scott” (the origin of the town of Scottland).

Family Links from 2018 to 1920 Prairie, IL Township

[The shaded tracts in 2018 are linked to owners from 1920. Please refrain from caustic remarks about my coloring – I get enough of that from my granddaughters.]

I also think we miss one aspect of powerful farm transition. A prosperous operation with significant owned acreage is a compelling career opportunity for even disinterested offspring. Unlike most small businesses, on-the-job training will suffice if the profit margin is ample, the case with owned land. It can be too good and too dependable to pass up, despite dreams of other careers. Land can create farmers from non-farmers, so to speak. Not many professions can duplicate this feat.

Finally, I strained my remaining synapses to recall any first-generation farmers in my township. While the hired-man-to-operator pattern was still functioning in my youth, I know of only two examples, both my father’s generation. In fact, I cannot identify any 2nd or even 3rd generation farmers in my admittedly tiny data set.

It should come as no surprise to an industry that nearly worships the ideal of the family farm that our industry is essentially closed by birth. If an aspiring farmer lacks parents, relatives, or a mate within the current ranks of farmers, there is a vanishingly small chance of a grain farming career. This stark reality should temper some of the blame we place on policy for thwarting young farmer dreams. It also suggests that startups in our business will essentially be small, agrarian and dependent on direct sales or niche markets.

As my son would say, “It is what it is.” While I think consolidation of grain farms may inch upward, recent flattening of the consolidation curve noted by the ERS could signal we are approaching the constraints of our hereditary structure of ownership.

 

Gross Cash Farm Income Shifts

“However, note that much of the consolidation in sales occurred between 1991 and 2007, and it appears to have slowed considerably afterwards. This finding is consistent with the slowing of consolidation shown in most livestock sectors, and also with slowing consolidation in some crops. However, estimates of farm profits derived from ARMS indicate that larger farms continue to realize better financial returns than smaller operations, so we cannot yet conclude that the apparent slowing is more than a pause.”

Technology could stabilize this by enabling viable one-person operations on a modest base of owned acres. However, large autonomous equipment is more easily adapted to larger tracts, if for no other reason than road risk.

These already potent factors will be amplified by lower estate taxation. While never a huge factor for farms (a handful per year affected), any impact such taxes do have is to slow consolidation of ownership. The slow shift of national income share away from labor and to capital is working in agriculture as well. Rents remain stubbornly high as operating margins evaporate. The math makes even majority land ownership a tall order without a hereditary jump start.

Grain farmers have much to be concerned about, but there is scant evidence permanent, enormous farms will emerge anytime soon. Large operations will likely come and go. This is good news and bad. While ownership patterns seem to moderate farm size here, this is not the case elsewhere. If there are enormous economies of scale and rewards to automation for grain production those profits will likely be harvested in South America, Eastern Europe, and Africa.

 


©John Phipps 2001, Top Producer

Cash May Be King, But Dirt is Destiny

Avarice comes in many flavors. My particular passion is for land – something I have usually considered a failing. This real estate appetite has been surprisingly persistent, compared to other must-haves in my life.

My longing for machines waxes and wanes but has diminished overall with age. The hunger for acclaim is now weighed against the hassle of public involvement. I have enough woodworking tools. Almost.

But land – like the acres next to mine, for example…

Especially here in the US, where property rights are nearly absolute, ownership can be a narcotic. Like all acquisitiveness, a mild case can be the wellspring of virtuous ambition. Drawing the line where obsession begins is not easy.

Land ownership has drifted in and out of economic fashion. In the 70s, inflation made ownership a slam-dunk, encouraging extremes in leverage and expectations. The great lesson of the 80s was that dollars (income) were more important than acres (assets). “CASH IS KING” became the mantra for agriculture. For good reasons, it turned out. Cash flows quickly to the highest return, can be counted easily, and can theoretically be converted into whatever is desired.

So we shifted land ownership costs to outside investors to free resources. Then rents began to rise, as owners discovered that farmers could be auctioned off against each other.

Well meaning, but essentially unlimited, acre-based government subsidies propelled the trend. To the surprise of clueless legislators, subsidies flowed directly to landowners – a logical consequence for this scarcest ingredient.

Meanwhile the owner operator fared better. As margins collapsed, the “land charge” figure in breakeven calculations was revealed as a figment of accounting imagination. There is no opportunity cost for an asset that will sell only “over my dead body”. Similarly, land charges only make sense if they are not paid to the same bank account as the gross income dollars. On owned ground, my “land charge” is real estate taxes plus my mortgage payment. In a few hundred years, when I outlive that payment, my breakeven will plummet. On inherited ground, I can grow $1.00 corn. This is reality accounting.

“CASH IS KING!” is a philosophy of non-commitment. It is like saying that never getting married is best because you are always able to choose the best mate available. Those of us who have signed on to matrimony, on the other hand, are stuck with our choices – doomed to living lives of shared happiness and fulfillment instead of keeping our options open for Mr./Ms. Perfect.

While buying land may severely burden early generations it fortifies successors – a quaintly dated ideal for our “I got mine!” era. In such service to others many paradoxically find true freedom.

The “King”, like most royalty today, seems increasingly irrelevant. Farming has become such a desired career that farmers will toil below breakeven costs, more or less permanently. In essence, we pay to farm. Even given more “kingly” cash we would simply pay to farm more.

Cash is virtual wealth. It cannot generate any real benefits until it is exchanged for something tangible. Meanwhile, land conveys immediate benefits and essential rights. Since landowners decide who farms, ownership is career security. I have never seen a valuation for this right, but farmer instincts treasure it.

Choosing cash, we can forget that a farm is not the farm. To be sure, if we had all sold out in 1979 and repurchased in 1987, we could have ended up with double or triple the acreage, but almost assuredly not the same acreage. Cash can optimize the arithmetic, but not the dream.

Real estate illiquidity can also reduce spur-of-the-moment spending – often a sound restraint. In fact, inherited land may persist in a family longer than inherited money. The hassle of selling Grandma’s farm often postpones ownership changes. Moreover, if four children inherit $250,000 each, how likely is it they will place that investment completely in the hands of one sibling to manage in the way that 320 acres would be rented to the farming brother? Indeed, farms can be the glue that keeps siblings connected – a material link to a past.

Such ties can both bind and gag. But at a minimum, they provide an excuse to communicate, and a true luxury in our super-mobile society: a fixed “home”. Allegiance to a “place” can be carried to harmful extremes, but when balanced by respect for persons, can add a beneficial dimension to family dynamics.

Owning land, for all its costs, comes closer to providing farmers a predictable future than other business plans. While cash may be the path to the most affluent future, it cannot insure what that future life will look like. This unheralded ability to reach into the future and secure a chance for a definite type of happiness is the reason that land will continue to draw those who to keep the door open for our unique lifestyle. We are buying a destiny.

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Comments

 
Spell Check

dpk
Valley City, ND
2/11/2019 07:35 AM
 

  Coming from a family with 7 offspring and fair parents, my thoughts have been estate taxes get the rap, but it's big families and fair parents that break up the family farm.

 
 
ck
bad axe, MI
2/11/2019 06:22 AM
 

  John it would of been nice if you would of went one more step on this report and would of compiled a report on how much of the land had a mortgage on it in 1920 and the average amount owed per acre on that. Than did the same for 2019 , breaking it down by descendants who are landlords, and descendants who are actively farming.

 
 

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