Historically low interest rates that followed the 2007-08 financial collapse have had a positive effect on U.S. net farm income and the price of farmland — but when interest rates move higher will that push income and land prices downward?
For some farmers, maybe, says Brian Briggeman, associate professor and director of the Arthur Capper Cooperative Center at Kansas State University.
But comparing present day scenarios to farmland “bubbles” of the past, there is a difference in the debt picture of many farmers, the former economist for the Federal Reserve Bank of Kansas City said at the Mississippi Farm Bureau Federation’s joint soybean, corn, wheat, and feed grains advisory committee meeting at Grenada, Miss.
“These very low interest rates have been the primary driver of net farm income, and they are certainly an important factor when looking at agriculture as an investment, the price of farmland, and the effect on the value of the dollar and exchange rates by making our goods more affordable in the global marketplace.
“Interest rates have two important impacts on farmland values — they affect expected farm income and capitalization rates, which have an impact on farmland values.”
The current low to negative rates tend to push up farm income, Briggeman says, and have helped to support farmland values by lowering the opportunity cost of capital, so investors are now looking at farmland as a very appealing investment.
“If I can buy farm ground and get a 4 percent to 5 percent rate of return, that sounds good in comparison to other investment opportunities. Low capitalization rates have helped support farmland, and overall demand has risen.”
Interest rates are expected to be low going forward to 2015, he says.
“When the price of money is basically zero, and investors are trying to reach for yield and a potentially a safe return, agriculture is a natural place to look. History has shown that periods of exceptionally low interest rates benefit agriculture by helping to support prices through lower exchange rates, making our goods more affordable, and pulling up net farm incomes.
“If we look back through these commercial paper rates, adjusted for inflation, going back to 1910, we see periods when there was a dip into negative territory, when the real price in financial markets was negative. If we overlay that with a net farm income chart, we see real net farm income really spike. We’re in that kind of period right now, where we have negative real interest rates and net farm incomes are very strong.”
Farmland value bubbles
Looking at county level farmland values in Iowa, Nebraska, Kansas, Missouri, and Oklahoma, Briggeman says there have been previous farmland price bubbles.
“The very first one since the turn of the 20th century, was in 1900, when we saw farmland values begin to increase rather rapidly. After World War I, farmland values caught fire, with surging ag exports and excessively leveraged farms. Then came the Great Depression and the stock market crash, and many farms went bankrupt, with a lot of forced land sales, and the fire was out.
“After World War II, farmland values started to heat up again as new technology was being adopted. New export markets and easy credit set farmland values ablaze, particularly in the corn belt. By 1978, Iowa farmland values were red hot and the fire was spreading throughout the region. Even marginal farmland was becoming more valuable.
“But when the 1980s farm debt crisis started and interest rates went sky high, producers weren’t even able to make interest payments on their debt. This really weighed on farmland values and by 1987, with many forced farmland sales, the fire was out. We returned pretty much to the lows of 1940.
“In 1997, we started a slow recovery and in 2007, with strong global demand, large ethanol production, rising incomes, and low interest rates, things were heating up again. By 2007, a booming U.S. housing market and surging ag exports had lit another fire under land values.”
So, do today’s elevated farmland prices foretell another bubble that’s destined to burst? And what would be the impact?
What’s different now, Briggeman says, is that “We haven’t been seeing the levels of debt leverage that we had in the past. Despite media speculation and warnings of potential farmland bubbles, the debt just isn’t there.”
If a “shocking drop” of one-third were applied to today’s farmland values, he says, “Farmers could lose a significant amount of wealth.
“Decline in equity would average about 23 percent,” he says. “But it would be a bit more steep for those farms with debt — an average of about 25 percent.
“Younger operators and larger farms with greater than $1 million in annual sales might not see as much impact on their balance sheets, because if you break down their total acres, most are on a sharecrop or cash rent basis — they don’t actually own the farm ground. So, we wouldn’t see as a big a drop for them.”
Looking at USDA data on those with debt, those who would feel the most impact would be small farms (less than $1 million in annual sales), livestock producers, crop producers, and older farmers (35 years and up).
One impact of today’s agricultural boom, Briggeman says, is that more young people in agriculture schools are now looking more favorably on farming as a career.
“When I was in college, in the era of ho-hum markets and $2 corn, young people formulating their career paths didn’t want to go back to the farm. They felt there were better opportunities elsewhere. Those of us who opted for other careers then look at today’s commodity prices and farmland values and wonder if we made the right decisions in choosing non-farming careers.
“A lot of farm balance sheets today look really, really good. In my Kansas State classes, I’ve asked students who have grown up on farms and ranches if they plan to go back. About one-third say yes.
“When I asked if high cost of entry were eliminated, would they choose production agriculture as their profession? Three-quarters of the hands went up. If you’d asked that same question in my classroom in 1966, probably not a single hand would’ve been raised, because production agriculture just wasn’t attractive.
“Today, there’s a real opportunity in farming, and the interest level in farming is pretty profound. There is, of course, the challenge of figuring out how to pass over farms and ranches to the next generation without giving 40 percent to 50 percent to the government.”