Recent resilience in US farmland values has provoked both bemusement and anxiety. Bemusement at a sense that investment opportunities are being delayed and anxiety that appraisals are not yet fully reflecting the degree of distress facing producers. The difference, of course, depends on perspective and benchmark used.
In advance of a self-imposed March 1 deadline for progress in trade negotiations with China – in which agriculture has played a pivotal role – recent weeks have seen a raft of press coverage of bankruptcy and financial distress levels in agriculture.
These stories have generally focused on farm income rather than underlying land values, and have mostly relayed regional banks’ and Federal Reserve chapters’ loan delinquency and credit quality reports. Some have framed indications of deteriorating credit quality from a political perspective, suggesting they partly serve as a gauge of a potential weakening in support for President Trump among his rural constituency.
During a call focused on the National Council of Real Estate Investment Fiduciaries’ fourth quarter farmland index this month, University of Illinois professor Bruce Sherrick said that, while such stories likely report these statistics accurately, they often lack important context.
“Delinquencies and non-accrual rates are ticking up, but they are ticking up from numbers that have been historically almost zero. Following such a strong performance period, I think of it as more or less returning to a normal rate,” Sherrick said. “We have good performers who are making money and some poor performers who may have to reorganize.”
Because the farmland assets measured by NCREIF are managed as investment properties, Sherrick acknowledged they consistently outperform the broader range of agricultural properties presented in other readings, such as those provided by USDA. From that broader perspective – which includes small hobby farms and large family-owned operations battling low commodity prices – steady farmland values seem an anomaly and increasingly under pressure.
During the USDA’s annual outlook last week, chief economist Robert Johansson highlighted the role resilient land prices have played in helping US farmers absorb a decline in net income from $134 billion in 2013 to about $66 billion last year. Combined with low interest rates, Johansson argued resilient land values have helped keep traditional measures of sector-level health – such as debt-to-asset ratios – below historic lows set during the early- to mid-1980s.
Still, he added, troubling data points have surfaced.
“Farmers have increasingly tapped into that real estate equity to provide operating loans and today total debt is approaching record levels in real terms and real estate debt reached a high last year,” said Johansson, highlighting that debt financing rose to consume 25 percent of net farm income in 2018.
“The growing share of farmers’ cash receipts that goes to financing debt is likely to cause cashflow problems for producers without significant land equity.”
From an investors’ perspective, such cashflow problems could translate into an increased willingness to sell or at least enter into sale/leaseback transactions, which are becoming increasingly popular, according to market sources.
But farmland managers should also take an honest look at what helped bring so many of them into the market during the heyday in the early years of this decade. At least two of the key drivers of that boom – an ethanol mandate aimed at reducing fossil fuel usage and exports to a growing China, aligned with US decision-makers – seem unlikely to reappear and out of sync with the policy positions understood to have helped President Trump secure rural support.
The gulf between the measured optimism inspired by recent performance of the investment properties reported by NCREIF and the foreboding tone borne of the USDA’s broader view reflects the complex landscape US farmland investors traverse. To further complicate things, the road to financial recovery for struggling US producers will no doubt be shaped by the outcomes of ongoing debates regarding trade policy, domestic dysfunction and climate change.
All of which calls for a cautious approach from investors looking to form long-term partnerships in competitive farmland markets. Expanding gradually in collaboration with the best young producers – without giving the impression they see bad news for ag as good news for them – seems like the prudent way to go about it.
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