Commodities markets will influence stability and farmland market
Farmland values will remain strong, according to analysts, but they are uncertain about commodity prices for farmers this year – a key indicator of farmer financial health and land values.
Most crop farmers have accumulated working capital and strengthened liquidity in recent years, making it likely they will absorb increases in operating expenses caused by inflation and COVID-19 panic.
However, long-term increases of operating expenses that we’re seeing now, coupled with depressed commodity prices, would stress all farms, especially those operating with less available cash.
Tait Berg, senior agricultural coordinator for the Federal Reserve Bank, Minneapolis, expressed his concern in a generally optimistic assessment of high-profit farms that have done well through recent years of economic downturn and flu panic. However, he’s concerned that prolonged financial stress will hurt crop famers liquidity, leading to more break-even or negative profits – especially among low-profit farms.
Farm and ranch land sales are expected to be very dynamic during this time of tension.
Berg urged farmers to take stronger liquidity measures in boom times because the boom-bust nature of agriculture could see serious financial problems in the bottom cycles, particularly in current economic uncertainty.
If commodity prices remain elevated, underperforming farms probably will absorb expenses, but if commodity prices are constrained, farmers could be in trouble, he projects.
Bert used financial data from FINBIN, an agricultural financial database, for his analysis.
Farm Income Has Improved
In a separate Federal Reserve report, Berg said that while 2020 and 2021 farm income was better than expected, COVID-19 panic triggered declines in agricultural commodity prices, down by 11.4% in one month. Government pandemic aid packages for the agricultural sector helped improve farm-sector income and financial conditions, but those won’t last forever.
After several years of below-average farm income and increasing farm-debt levels, farmers were able to stabilize finances and pay down loans, but Bert is concerned that as input and product costs rapidly increase, the situation quickly could change.
After a period of weak loan demand with the positive upswing, unexpected expenses could squeeze cash flow projections and increase demand for additional credit, which would push loan balances higher and weaken farmer balance sheets and operational capability, Berg said.
Depending on how extreme the shift in commodity prices, ongoing increases in operating expenses will affect farmers’ ability to maintain liquidity. In 2019-2020, interest expense surged to 160% of working capital, Berg reported. In that period, the bottom 20% of farms had near zero or negative working capital for operating expenses. When interest expense exceeds working capital, capital comes from restructuring debt or selling assets.
Current commodities forecasts are positive, but forecasts may change once spring planting is determined.
Inflation Wild Card
Bert said longer-term increases of operating expenses because of inflation and scarcity, coupled with depressed commodity prices, will stress all farms—particularly the bottom quintile.
The U.S. Department of Agriculture reported average value of American cropland rose 14% in 2022, eclipsing strong commodity prices, inflation, and production costs. It was the second consecutive year of substantial land value increases, especially in the Northern Plains, Corn Belt, and Lake States.
Paul Pittman of Farmland Partners points out that limited availability of farmland and increased demand for food because of a growing global population will increase farmland value. Pittman says, though, record-high land values isn’t the big concern for investors as much as the long-term value of cropland investment. He said values go up and down then plateau, but he pointed out that since the 1970s cropland value overall has increased about 6% annually.
This phenomenon is one of the drivers of more high-wealth individuals buying farmland, such as Bill Gates and other billionaires seeking to protect assets and control food.
Kevin McNew, chief economist for the Farmers Business Network, expects farmland values to strengthen this year. Farm income may decline but not collapse like 2016-2020. He said inflation and continued high commodity prices will play well into farm incomes and stability.
Target Prospects With Data
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