02-12-2013 06:21 PM
Thought this was interesting to consider.
Not if but when it all hits the fan and then how far it spreads is the question.
U.S. agriculture is underestimating its vulnerability to another adjustment in land prices, Purdue University economist Mike Boehlje told 150 farmers attending the annual AAPEX meeting in Cabo San Lucas, Mexico, this week.
With Iowa land auctions bringing more than $20,000 an acre in some cases this winter, “the question isn’t whether we’re in a boom, it’s how long the boom will last and what the bust will look like,” he said.
Optimists have contended that the surge in farm net worth will cushion any blow should land values correct any time soon. Some economists believe farmland owners may feel the fall, but they won’t take farm banks down with them like they did in the 1980s.
Those who believe that paper wealth will buffer any correction in the farm economy forget that land and farm machinery are likely to depreciate in tandem — and that adjustment could be swift when it happens, Boehlje warned. What’s more, nearly 85% of farmers’ net worth consists of farmland today — a far more concentrated investment than before the land crash of the 1980s.
Wisdom is knowing not to put it in a fruit salad.
02-12-2013 08:10 PM
Of course 20K land is not sustainable - nothing insightful there.
all this cash and investor money changes the landscape; so does long term low interest rates. not the risk of the 80s.
land will keep its overall steady climb - will slow down; can't stay this red hot but the fuel for a crash is not there - we don't have the extensive leveraging of the 80s or what we just saw in the housing crash with no money down and no credit checks. folks may lose some equity but not the viscious circle of forced sales. when corn has a 4 for a price, you might find some bargains but I don't see a crash. i think we will see a steady climb - its about the fundamentals which are different right now.
02-12-2013 08:34 PM
Big rock:: I was in a dealership returning unused parts and pricing a new planter. $89,000 for a basic model and $140,000+ for a tricked out one.
Anyway can't get one till next year (2014). Started talking about farm economy and the dealer said he saw lots of under 50 farmers with 1500ish acres of rented ground and only owning a 1 or 2 acre farmstead.
This is the dude that will be gone in 60 seconds along with a years back rent to some old farmer or investor. That will have a cascade effect. Very few BTO's have the where for all to hold out with $4 corn, their cost of production is in the 5's or 6's on the rented portion of their operation.
Many of us 60ish year olds are not going to fill the void at the "old" rents. The pendulum always swings too far one way then too far the other. Right now it is at the "everything has to be perfect to work" portion of the swing.
No illusions here about the good times forever syndrome. I'll wait and buy that planter at the "bankers sale" .
02-13-2013 04:29 AM
Hobby: I agree the pendeleum always swings too far - but right now it is not set up to swing land prices in a whip saw like we saw in the early 80s. land prices will slow and dip some but the fundamentals for land are in place for prices to hold firm, not a crash and burn.
we are also undergoing a steady but fundamental shift away from owning a high percentage of acres to large scale opertions that rent a majority of land - shifts in effect the same as we have seen in poultry, hogs, and now dairy being large concentrated operations. the costs of planting a few thousand acres now are staggering - takes a lot of financial firepower just to plant corn.
cost of production in the high 5s or 6s to me are not sustainable.
Folks well positioned such as yourself will undoubtedly fare well when there is a correction - i just don't see a repeat of the 80s. now if all farmland was selling for 20K/acre with no money down, you would be buying that planter from the banker real soon. perspective: in your position high risk makes no sense whereas for the farmer with 1500 acres owning 1 or 2, well that probably is his only option to farm. that is the kind of leverage that leads to a disaster when corn starts with a 4 or god forbid a 3.
You have a few years of wisdom on me, but I remember the brutal auctions of the early 80s all too well - the young tigers. And i understand that the thinking is always "its different this time". right now what I am saying is that it is different from the 80s that can be summarized in one word: cash. cash down, cash investors vs. the leverage. There is a tremendous amount of cash flowing into land from investors as well as well positioned farmers. that can change in a hurry - you may get a bargain planter in a few years, but the bargains on land of 50% off are unlikely without numerous financial issues. given our record low inventories - that planter is probably off a few years. take more than a few good years worldwide for that planter to be available although I am betting you will need a tax write off before then. its the world wide weather disasters as much as the fundamentals in the usa driving things.
02-13-2013 06:26 AM
I'm not so sure you are totally right. I;m not going to bet the farm on it. The majority of the paid off land is in the hands of 60 to 80+ year olds.
What does that mean? ... It will change owners shortly, what happens then? ... 75% of the time it is sold because one or more of the Kids just "wants the cash" .
The other thing that will add fuel to the fire is going to be the death tax based on these "new and improved" prices. I can see a cascade effect in about 5 years.
Much of the worlds farmland is not being used. Brazil still has millions of acres. Some of the former Soviet block countries have untapped potential. I just saw a private weather summary of the worlds weather and growing conditions, and right now just part of Austraila and the wheat belt of this country are the only ones really hurting. Until the last five years farming has never been a get rich quick deal. The good old days are not too far away.
02-13-2013 06:49 AM
Good morning !
A lot of good post's and idea's on here , I have to agree AND disagree also -- lol - Hobby knows me well and will say that I'm a PIA sometimes .
I went thru the 70's and 80's also , Boy was that a B-t-h time of my life ! Really I think that the main point has been missed here , It don't have nothing to do with owning or buying ground at all , BIG rock nailed it ! Its all about leverage !
Help me here you OLD tiger's -- lol -- But in the 80's I seen a lot of VERY good farmers bite the dust , some bought ground , some built new hog barns , some built there cattle operations , -- new equipment - you name it , and yes my friends - they owned chit loads of ground they were not even immuned , It was how much they were leveraged ! Payment's are payment's , whether it's in ground or in equipment .
Yes it does help if you have ground paided off , but how many times did you think -- OH chit -- what was I thinking when I brought that ground ? Or New planter OR tool shed ? Or I'm I just a worry wort ? LOL
The funny thing about playing in the BIG casino is there are just as many way's to lose you AZZ as there is to hit the mother load .
Just my 2 cent's -- lol
02-13-2013 06:59 AM - edited 02-13-2013 07:16 AM
Bigrock - give me a break! Like Hobby says that group of farmers that came in after the 80's depression that did not buy land, when it was cheap, but instead decided that new equipment rather then owning land was the better option, are nothing more than "flashes in the pan".
Of course there was alway an excuse to not buy it, it was too expensive, it was not a great farm, and it went on and on. But they seemed to have money for the downpayment on that new pickup, and sit on their ass at the Co-op every morning whining with the other losers who seem to congregate there.
No farmer not owning their land at some point in their farming career was never serious about farming. Because in most cases the only asset a farmer really has is the land he owns, not the land he rents, or the new green paint sitting in the shed depreciating every day it sits there looking pretty.
If you acually believe that land being purchased in Iowa is all cash with no debt or other assets pledged as collateral, send me some of what you are smoking. I know a few people who have been buying and and believe me, they are putting up other land to get the mortgage to purchase the farmland being purchased.
As for the 80's, leverage was the name of the game, land was never going to get any cheaper, they were never going to be making anymore of that Iowa dirt, and the prices were never going down, only going up. Just like it is right now, when the crash comes, most farmers who own land will be getting calls from the bankers or John Deere Credit asking them "what they will pay" not telling them "what they will pay for Iron sitting on their lots.
The crash is coming, don't worry about corn hitting $4.00 let it hit $5.00 and you will be witnessing major liquidations and breaches of land leases by these nimrods. You see bigger is not always better. In my area of Iowa, the weather alone is notorious for making little farmers out of big ones, usually it takes a divorce that does that.
So go to the Recorders Office in any County in Iowa and run a paper chase on the property that sold at auction and let me know how many of those only have a deed recorded from the previous owner to the new buyer. I am sure that will open your eyes on this fantasy that everything is all cash.
I have a friend that just paid $800K for a farm in Iowa, Federal Land Bank holds the note on that farm. I had another run a farm to $1,400,000 and the sale was called off, but to get the money needed took the pledging of 160 acres that was paid off to a Northern Iowa Bank to secure the financing on the land. I do know a few people that paid cash who drew the money out of their retirement fund and put it into a small parcel of land, but they were not farmers.
It would be nice if everything one reads was true, but it isn't. No one want s to tell the truth anymore, the "Big Lie" is now the soup of the day. Adios Amigo. John
02-13-2013 10:51 AM - edited 02-13-2013 10:53 AM
So I am one of those 'old' guys.
Farmed in the 60ies and 70ies etc.
70ies were great could not do anything wrong even when I made a mistake it seemed to correct itself with great prices and yields.
Bought and bought then had a health problem scare and slowed down just before the crunch of the 80ies. Did I say it seemed I could not make a mistake?
Scraped through the 80ies, pulled my head in and here I am with no debt.
Yes lots of 'young and old tigers' bit the dust in the 80ies. Bought at the wrong time with what turned out to be too much debt. Some were good farmers some not so good of business people.
Cost a lot their marriage too.
It can happen again. It will happen again to some.
Sometimes it is wise business decisions and some times it is pure luck in timing.
Land selling for 15,000 low end to sales at 24,000 per acre in this area.
You have to want to farm to pay those sorts of prices.
Figure the costs of carrying a purchase like that and ask yourself if you want to take the profit from other land to pay the cost of owning.
Wisdom is knowing not to put it in a fruit salad.
02-13-2013 11:05 AM - edited 02-13-2013 11:16 AM
Local farm paper just published costs of buying so here are their numbers.
they used a purchase price on the low end of land sales here.
Bare land they say and already tiled.
$16500/ac equal payments (ammortized)
At 3% over 20 yrs $1,109.06/yr
At 4% $1,214.10/yr
At 5% $1,324.00
Hard to get repayment over 20 yrs BUT over 25 yrs payments would be
Now what is your profit from cropping going to be to cover those payments?
Land can be rented for $250-300
And as my accountant pointed out the principle part of those payments has to come from after tax profit. Interest is a cost as is the rent.
Payment of principle is not a tax cost at least in Canada so has to come out of the profit from the farm. That is a huge chunk of change in the later years of the mortgage from profits.
I think some of these land purchases at these prices will cause the whole farm to fail in the future.
Buying with cash as an investment?
Figure the return on $16,500 or higher land.
Oh yes did I mention taxes and any drainage assessments that come along?
Wisdom is knowing not to put it in a fruit salad.