Back in July, the Kansas City Federal Reserve Bank held an Ag Symposium (which they have done annually since 2010). The first part of the symposium was a presentation by Dr. Michael Boehlje of Purdue on "The Ag Outlook: An Economic Downturn". Here are some my observations from that presentation:
- Real US Corn revenue per acre (in 2014 $) did not peak in 2012/13, but rather peaked in 1973 at $1,252 per acre. 2012 equaled $1,024 and 1974 the only other year about $1,000 per acre. the lowest gross revenue was in 1931 at $113 per acre. Between 1985 and 2005, the real revenue per acre bounced between $400 and $600 per acre with most of it closer to $400.
- Beginning in 2005, the real corn revenue started its rapid increase from $373 (2005) to $1,024 (2012) with only a dip in the 2009/2010 years.
- Land values as a multiple of cash rent was around 15:1 during 1967-1977, grew to almost 25:1 in 1981, dropped back to less than 15:1 during the 1980s-90's and then started a gradual increase to about 20:1 by 2008. When the financial crisis hit in 2008 and the rapid drop in interest rates (and thus available fixed asset returns), this ratio rapidly jumped to its current 30 :1. If rates increase causing the ratio to revert back to a more normal 15-20 to 1, then land values are likely 35-50% overvalued (assuming cash rents do not decline). If you factor in a reduction in cash rents and a reversion back to a normal multiple, then values are at least 50% too high.
- Key financial vulnerabilities are (1) working capital (should be at least 30% of revenues). Burn rate right now is in the $50-100 per acre range for many operators. (2) Cash shortages brought on by (a) operating losses particularly for tenant farmers (b), increased tax burdens (from having to liquidated more farm assets with no tax basis to pay down debt) and (c) capital expenditures. (3) Tight repayment capacity due to (a) short repayment schedules on equipment/land loans and reduced cash flows from farming.
- However, solvency is still very good with low debt loads, however, they are weakening rapidly for highly leveraged high cash rent farmers. There are still currently very few defaults or bankruptcies.
The overall tone of the presentation is that Ag is not as good as it was in 2012/13 (only one other time period when it was that good), however, it is not that bad either. We shall see how the trends work out over the next several years.
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