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Senior Contributor

3 big-time farmland factors; Income's still king -- Duffy

Boy, for my money, Mike Duffy's analysis of the farmland market is about as good as money can buy! He issued a report recently comparing the land runup up until today of the last few years and that during the 1910s and '20s, then the 1970s. I've become sort of a "geek" for this topic since I've been covering it the last few years, and this most recent report from him is probably the most interesting I've read on the topic. Basically, he's saying while there are some common factors between now and those past 2 "boom times," incomes are still ultimately going to determine where land goes from here. It's a pretty detailed analysis.

 

Though it is also my job, I'm really interested in this topic personally (maybe I need to find a new hobby?!). So, what do you think of the factors he discusses here and his final verdict? Do you agree? Is there anything he's not considering but should be?  

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Re: 3 big-time farmland factors; Income's still king -- Duffy

Couple of observations come to mind.

First, the world has shrunken tremendously in the century covered by the report. Commodities are transported much more quickly, and feasibility of moving masses of materials has changed drastically. Markets are less and less local, competition is broader and has more depth as well.

Decoupling food aid from farm support programs is possibly the beginning of the end game of a real safety net for American agriculture. I think we have pretty much agreed here that it does not bode well for us.

Second, the era of the first crash was, according to that wonderfeul history of Paul Conklin's, largely the genesis of the ASCS. Mitgation of the impact of the second crash was probably much of what was in place through the decades that followed.

The hype about land values and the nouveau riche farmer will likely be the undoing of much in the way of sympathy in the hearts of our fellow citizens, who have problems of ther own...mortgages upside-down, unaffordable " affordable" healthcare insurance, and decmated retirement fund investments.

How are people responding to Farm Aid thes days, Jeff?
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Re: 3 big-time farmland factors; Income's still king -- Duffy

Your have posted some interesting points Kay ---  

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Re: 3 big-time farmland factors; Income's still king -- Duffy

Perhaps I have the wrong point of view bout todays land buyers and those of the 70's and 80's. I doubt that much land is leveraged likeit was in the 80's. While folks may not prosper as much due to lower crop prices they aren't facing liwuidation either. Of course there are exceptions to that comment that there are probably those that are over extended., But they are fewer innumbers than during the 80's when so many were in trouble. Mostly by devalued assets that would not support the required operating capital. Under collateralized is the $50 word to describe that your assets won't support additional borrowing.

 

I don't think that type of everage describes many farmers today. I thinkfarmers are smarter and bankers are as well. But then maybe not!

 

In the last great ag depression, those with paidnoff asset and a strong cash position were in the catbird seeat for buying devlued properties. Yet many chose not to be buyers because they didn't know when the bottom was in on land prices. It still takes some cajones to pony up a bunch of cash tobuy an asset that has depreciated 60% with in recent history.

 

I think there are buyers alright. Those that would like a price setback on farm land . And opportunity not available for some time. The question is whether they will support the market or pick bottoms some time in the future? I suspect that some buyers will buy in and that may support prices at a higher level than the discounts of the 80's. So i don't expect a great sell off but then I have been wrong before. I don't think there is a big crisis on the immediate horizon.

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Re: 3 big-time farmland factors; Income's still king -- Duffy

The title pretty well sums it up.

If income is up then the price of land will rise accordingly and when prices fall the land price has to fall some too.

 

This sort of thing has been going on longer than just the 2 examples in your article.

 

The property we live on came with a lot of old papers from the properties history including the parchment paper deeding the land to the first buyer from the Crown.

 

So included were mortgage paers etc.

In 1880 a person bought the property for $12,000.

In 1884 they took a mrtgage out for $4,000 which all indications are built the house which we still live in.

In 1891 he sold the property for $8,000.

 

Reading through the papers we assumed it was a family transaction with the reduced price although names were different maybe it was son in law that bought it.

 

From later readings of history I discovered there was a  recession which occurred in the 1880ies and caused land values to fall, at least in Canada.

 

So is history going to repeat?

 

My bet is it will to some extent, but while it is happening few will be able to see and understand what is happening and even fewer will be able, either finacially or emotionlly to take advantage of it.

 

 

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Re: 3 big-time farmland factors; Income's still king -- Duffy

Cycles run like the seasons, until some force changes the dynamics. In independent hog production, we could count on a roughly two-year cycle of prices for a long time...we learned to be counterintuitive, and hold back gilts when prices were low. That allowed us to expand and replace on the cheap, and be in position to make good money when shorter hog supplies drove prices up after many reduced or liquidated.

Integration and captive supplies kind of blew that whole system apart. End of that predictable cycle, at least for most of us.

You make a good point about not making assumptions...the recession being a more likely reason for that landowner going upside-down in the 1880s. I have done some hunting for family roots, and people often leap to conclusions that turn out to be erroneous. I often wonder if a lot of so -called " history" hasn't been similarly fabricated....
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Re: 3 big-time farmland factors; Income's still king -- Duffy

Jeff, just my observations and 2¢.  In "normal" times maybe 3% of the farmland is offered up for sale, now if a combination of factors make say 6% of the land come up for sale, there won`t be enough buyers to bid it the crazy highs. And you start to see "no sales" and established farmers that you thought would hold forever are maybe putting up the "odd 80" for sale.

 

 

During the past 5 years I have posed the question from time to time "How is this +$10,000 land being bought with cash ?"  No one ever gave me a straight answer, the Landbarons all basically gave a nonsensical answers. However, land has went up faster than "war chests" could be saved up, whether you save up a war chest or bite the bullet and mortgage owned land, still that money has to come from "after tax dollars" and with all the new paint in farm yards, I highly doubt if many "after tax dollars" were put away. My theory on the "cash sales" has always been, if someone was set to put in 3,000 acres of crops without borowing, they had "$3 million" in operating capital, they could use that to buy 200 or 300 acres, then borrow money to put in crops next year. Technically that was a "cash sale" of land. If that is the case, grain prices going to cost of production could be a disaster for some.

 

But I have seen high priced land bought and pattern tiled in the same year and chicken poop spread on top of all that, with $4.50 cash corn and prevent plant acres...it`s gonna be interesting. But with losers there will be winners, I know a couple BTO brothers that bought land like it was going out of style up until about 2006, when they couldn`t buy it for $2,500, they just flat out quit buying.  They have had 5 solid years to pay it off and get their financial house in order with $7 corn.  Now they are posed to perhaps clean up if these large tract, pattern tiled, chicken poop farms get fire saled.  

 

I guess if one were to give himself advice 10 years ago, it would`ve been "buy all the $2500 land you can and pay it off with $7 corn" but hindsight is 20/20.  Tell me what the smart people will have done 10 years from now?  Smiley Happy

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Re: 3 big-time farmland factors; Income's still king -- Duffy

Do you really beleive that alot of land was bought with cash? I'll bet that would be a rarity. A good question for the Farm credit services guys.

 

I suspect that alot of land is bought by those that don't need the income to support the debt. They have income from other sources that supports their family and an annual deposit in their farm land savings account. Thus if the farm land throws off some of the cash flow for the mortgage, there is other income to support the rest.

 

Thus if you are a doctor a lawyer or an established farmer you know where the money is going to come from to service the debt. If you own 500 acres free and clear you know where the money will come from to pay for the next 80. While you may indeed take on debt, you know the dollars for the payments are going to be available.

 

The guys that buy the land and pattern tile probably need the tax deduction and what better way to make a capital inprovement to your asset when you can deduct it all in one year. That only works for owner operators.

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Re: 3 big-time farmland factors; Income's still king -- Duffy

No the the banker shut em off at $4K, so there was some version of "cash" that they obtained through creative means. And land has been bought by farmers, very few speculators. Some almost seemed disinterested in owning land until it got high priced then they all got a bug in their butt. But believe me those big shots buying $9000 class B land and sticking ?????$$$  in tile in it weren't doing it for a "tax write off" they already got more "paint" than a Sherwin Williams store for than.....they just though $7 corn was the new plateau.

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Re: 3 big-time farmland factors; Income's still king -- Duffy

Farm Credit Services will not loan more than $5,900/acre for Northern Iowa and FCS will not loan more than $4,200/acre for South Central Iowa land.  

The last land I sold - spec land - was paid for with all cash from investors.

The land market is very solid in my opinion - witih a declining dollar index - land values will be well supported at current levels and possibly rise higher if the dollar index falls substantially as all commodities will float higher - in my opinion -

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