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Senior Contributor

The current 'golden era': When will it end?

Just glancing through a report from the Federal Reserve on the current "golden era" in agriculture and how it follows the "boom-bust" cycle trend of about the last century. So, basically, that means the current boom will be followed by a bust at some point in the future. There are reasons, though, that this time the cycle's different than it's been in the last few decades.

 

So, where you sit, do you think the ag sector's setting up for a "bust" period? The Fed experts mention current debt levels as a big reason that the bust may not come. But, ironically, those debt levels -- and the capital expenditures they're affording some farmers -- are the reason there's still speculation whether the bust could arrive. 

 

So, what do you think? Are we setting up for a "bust?"

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19 Replies
Senior Advisor

Re: The current "golden era": When will it end?

As did the last boom ag boom bust cycle it will appear sooner than some think and later than what others expect. There are some that will suffer greatly and some that will have opportunity.

 

Meaning that values will probably decine and those with strong financials will be rewarded and those less prepared will suffer.

 

What is different this time is that we have incredibly low interest rates. Those with a lot of debt can service it at present rates. The last time we had onerous interest rates and declining asset values. Operating capital declined for many operations which diminished asset values as more land and equipment came to the auction block.

 

Hopefully most operations are not over borrowed as banks and borrowers should have learned from the last go around.

 

As far as the 'golden age' I suspect the high prices for land and rent will be self destructive for some farmers and it could happen sooner rather than later.

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Veteran Advisor

Re: The current "golden era": When will it end?

I think Kraft-t is right on this. 
I might add a little to what he says:  Right now interest rates are low, but what happens if comoddity prices drop, while at the same time interest rates shoot up?  That could put a lot of people in a sudden pinch, as they are paying high rents, and financing things with cheap interest.   I just have no idea how widespread of a problem this might turn out to be.   If only a few operators would be caught by surprise this way, there might be enough others who are financially solid, to take over parcels he was renting, if the rent was the right price.   However, get several large operators in a small area, and that might not be the case.

I think Mr Kraft is right, in that when the crash comes (maybe 1 year, maybe 10) those who are prepared, will have a great opportunity.

 

One other wild card, might be the age of farmers.  There are a lot of older guys around here, that are looking to let someone else rent that field a ways off from all the others, and spend less time in the field, and more with their families.  If too many decide to quit at once, it will be hard to fill the void, as the rest of us will have a hard time justifying big machinery expenditures in hard times to be able to greatly expand.

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Senior Contributor

Re: The current 'golden era': When will it end?

It will happen after an admistration change, weather it after this election or next one I don't know.  

The interest rate thing scares me just a little,  it is SOOOOOO cheap right now that its ridiculous.  Its only be this cheap once in the last 100 years.   Markets seem to retrace the last dance just with a differnet song and partner,  If they really wanted to "break" inflationary worries, or if they really wanted to service the worlds debt, how high would the interest rates go, Even if they went back to 10 year ago levels which is very possible, on $500/ac cost for corn thats $40-$50/ac just in interest cost.  

 

The last 25 years have rewarded businesses that borrowed to the max, That can't and won't go on forever.  

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Veteran Advisor

Re: The current "golden era": When will it end?

Worrying about who will farm the land reminds me of the 1980's and how much was said about keeping the deadbeats in business since if they were sold out, "no one would be available to farm the land". Remember that being said? I sure do, and I was trying hard to get some land to farm at the time I heard that, and I heard it many, many times.

 

RIght now there are plenty of people willing and able to take on more land if the opportunity arises, just like back then. I know a score of farmers, young and old,  that could and would jump at the opportunity to farm an additional farm. Wondering who will farm the land is not something anyone needs to worry about.

 

Having said that, I think the golden era of farming ends with a return to high yields around the globe, overproduction, and low prices. At the same time all of this is going on, our government will renege on promises of crop income supports in potential budget busting programs like ACRE, and federally subsidized crop insurance. It will be the 80's all over again as plans made on promises of lofty grain prices fall apart. At the same time, the dam will break on inflation, interest rates will rise and highly leveraged farm operators will be in trouble. We might as well get ready for the next round of bailouts, too. Once it starts, it keeps on spiraling on.

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Advisor

Re: The current 'golden era': When will it end?

Jeff, I recently visited with someone who is in the information loop and found out that a piece of land about a hundred miles north of me in KS went for well over $10K per acre.  The buyer paid cash.

 

That's a scary number in my neck of the woods.  I can understand paying $4 or $5,500, but not that amount.  The productivity, let alone any other factors cannot sustain that level for long.  On one hand, we can thank him for increasing the value of farmland, but on the other hand, we all know by now that whatever goes up will come down, and take tons of equity with it, not to mention place cash at a premium value.

 

I think the dynamics are good for a bust in the future, however, that's not saying when it will come.  More farmers are in very good financial shape than the last go-around.  Having said that, however, one financial guru, in a column I read elsewhere cautioned those who were paying down debt to not pay down too fast and jeapardize their working capital that will be vital if a correction were to come along.  A proper portion of long term debt with a low fixed rate is a good thing to have, even during a correction cycle.

 

Perhaps from another perspective, it's time that a new generation of farmers need to learn the fundamentals of agricultural economics and discover those lessons for themselves.

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Honored Advisor

Re: The current 'golden era': When will it end?

I see the interest rates as sort of a mixed blessing in a way.  There is another thougth i had on them, too:  If you are paying a rate of say half as much as normal rates, but land has doubled or more in price, you are still paying as much interest on the same acre, aren't you? 

 

Have I hit upon a logic fallacy, or fact? 

 

I think the beginning of the shift awasy form price-supported ag is underway, too.  Saw a news crawl somewhere earlier today that said ag payments were being attacked, I think by the White House.  Regardless of where the move from payments begins, I think it ends in the same place...not a good one in the countryside, for sure. 

 

I guess if a family paid cash, then they only lose equity, and that is a risk you take when you wake up every day anyway.  There are going to be some who are too leveraged, and those are going to be ugly.

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Senior Advisor

Re: The current 'golden era': When will it end?

As You know Kay when most farmers buy real estate they lock in the interest rates for long term. Not all but most do and some opt for varible rates which has worked ,really well the last decade. I'm currently pay 2.5 % on the remaining mortgage which has been a long term variable. Which would have been retired if the interest rates had become excessive.

 

Where they are apt to get into trouble is working capital could get really expensive as it did the last time around. Capital intensive operations paying high rates can really cut into the P&L statement. Thinner margins make it difficult to cash flow and mprtgage payment may become difficult to make along with servicing the working capital debt.

 

Borrowing money works really well until it doesn't. You're right in that the interest rates should remain the same if the mortgage rate is fixed.

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Honored Advisor

Re: The current 'golden era': When will it end?

When we paid out, our rate was roughly a third what it was at some points in the financing of this farm.  If we looked at the land alone, and none of the improvements, the value of what we bought in 1994 has roughly multiplied 5-6 times over.  My point is as follows:

 

Given the price of the land at purchase in 1994 as X, if interest then was say 10.5%(X), and today is is 3.75%(6X).  Doing the math, annual interest, not allowing for principle paid down, is roughly .105 X for 1994, and .225X in 2012...that is actually double the interest, or slightly more. 

 

That means that actual interest cost for the same acre has not decreased, but has increased significantly.  Add to that the jump in real estate taxes, and you have a lot higher costs for just owning the same acre than you did less than 20 years ago. 

 

I have no doubt that operating costs will be ponderous,. interest rate increase or not.  Inputs have a way of ratcheting up, shrinking profit margins. 

 

With political sympathies shifted away from ag, now that the media have convinced everyone that all farmers are multi-millionaires, we are going to see a shift from public support for farms, and thus food security.  I remember when my father had his "golden age," starting right about when I graduated high school and left for collge, things got very flush with cash around the farm.  That was well before the "blood on the scarecrow" eighties. 

 

The boom/bust cycle has repeated itslef many times.  You are a bit older than I am, so have a better perspective on this.  For now, we will remain conservative in our ways...would rather have it and not need it, than need it and not have it, savings-wise. 

 

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Advisor

Re: The current 'golden era': When will it end?

Well said, Kaye

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