October 04, 2022

Coronavirus impacting working capital of farmers

Low interest rates support farmland values

OMAHA, Neb. — Farmland values provide stability for the agricultural industry during downturns in income.

“Farmland is growing in importance since it makes up 83% of the total assets in agriculture,” said Randy Dickhut, senior vice president of real estate operations for the Farmers National Company. “And it almost makes up 100% of the equity in agriculture.”

Since the peak of land values in 2013, Dickhut said during a webinar sponsored by The Chicago Farmers, they haven’t fallen as much as many people think.

“The average land value in Illinois has plateaued, and we’ve come off the top,” he said. “The return on investment has declined over time to around the 3% range, and the value is at $7,000 on average.”

In Kansas, land values are very different.

“They have irrigated land, dry land, wheat land in the Western part and a lot of pasture and CRP land,” Dickhut said. “The value there is at $2,000 per acre, and they have little wider gyrations in the changes.”

Arkansas land values are nearing $3,500 per acre, Dickhut said.

“What’s interesting about Arkansas is the land value hasn’t plateaued,” he added. “Arkansas has a different crop mix of corn, soybeans, double-crop oats and double crop wheat.”

In addition, there is a lot of investment interest in Arkansas land.

“The ROI has historically been a little higher, and there’s a little more risk, so this state is a good place to invest for some diversity,” Dickhut said.

“Farmland is a good long-term investment because of the consistency since is always rented, and it is favorable compared to other investments,” he said. “And farmland is countercyclical to investments like the stock market.”

At the beginning of 2020, Dickhut said, many people in the agricultural industry had a little bit of optimism.

“The 2019 crops turned out a little bit better, grain prices were getting a little better and livestock prices too,” he said. “And there is also the ‘Phase 1’ of the Chinese trade deal, so there was optimism we were on track to get a little better.”

However, a lot changed as coronavirus impacted economies across the world.

“Best laid plans don’t always happen, and that’s what is happening this year,” Dickhut said.

The lower supply of farmland for sale and the low interest rates are supporting land values.

“But we have the income of today’s agriculture that’s a real challenge to supporting land values,” Dickhut said.

“Net farm income averages around the $84- to $85-billion range,” he said. “Almost half the time, U.S. farm income hangs around average to slightly below, about 25% of the time it is above average and 25% below average in the $50- to $60-billion range.”

“Recently, the net farm income was bouncing back up to average or a little above, and a significant portion of that from 25 to 30% came from government support through the Market Facilitation payments,” Dickhut said.

“The most troubling for agriculture now is the working capital,” he said. “That is the cash from income to pay living expenses, bills and to invest in new technology, which has had a significant decline.”

For the longer term, Dickhut said, there are several big converging trends that may impact land values including the Internet of Actions.

“Through the internet, artificial intelligence and virtual reality we are doing things like driving the combine, turning the sprayer off when you don’t need it and fertilizing only certain spots in the field,” he said.

Additional trends include the generational transfers of farmland, rural challenges, as well as changing food preferences and eating habits.

“We are in much faster times with land value trends changing a little faster than they use to,” Dickhut said.

Following the impact of the coronavirus, Dickhut said, three driving trends, including sustainability, traceability and financialization, will be part of the new normal in agriculture which may affect land values.

“Sustainability includes not only resources, but having a secure source of food and fiber,” he said. “Traceability will be important for knowing where your food comes from and for disease protection.”

Technology is changing financialization, Dickhut said.

“A lot of capital has been available in the past to connect the farm to the end user,” he said. “Technology startups have been working to trace grain sales, and there will be more capital coming in to finance the vertical connection for the supply chains.”

Some of the challenges in rural areas are population loss and the impact on the workforce to support agriculture and the schools.

“I don’t think that challenge will change,” Dickhut said.

“Another trend is electric cars and the effect they will have on ethanol demand and corn prices,” he said.

“Also alternative proteins, lab-grown meats and precision fermentation for creating cheese products,” Dickhut said. “Even if you only substitute part of our traditional meat products, that may have an effect on the demand for livestock.

“The Midwest is a prime spot for land investment because of the climate we have,” he said.