A survey showing a decline in farmland values for the first time in decades spurs concerns ranging from a return to the 1980s farm crisis, cash rent adjustments and how low is low.
Darren Frye, president and CEO of consulting firm Water Street Solutions in Peoria, addressed these concerns in an interview with AgriNews.
Is this decline in farmland prices the beginning of a trend, an adjustment or an anomaly?
Longer term, farmland will continue to go higher, because land values tend to move higher over time. That trend has been established for a long time. That is determined primarily by 3 to 3.5 percent inflation a year. It’s also been driven by yield, and as long as farms have not topped out the yield of what they plan to grow, then I would say farmland has the potential to go higher.
Farmland values are closely correlated to yield and not correlated as much to commodity prices because commodity prices fluctuate frequently.
Commodity prices are retreating from high levels because supply has returned to the market. So land may back off a little bit because it has become inflated based on demand, whether that was due to land investors or farmers. Secondarily, there’s been a lot of demand to push cash rents and to take advantage of the super cycle that was going on in agriculture. I think that has now come to an end, and we’re waiting for the next cycle to happen.
Are there any parallels between today and the early 1980s farm crisis when the agriculture land market hit rock bottom?
The contraction that’s happening now isn’t long term because it’s not a crisis like the 1980s, when farms had put just 10 or 20 percent down on land and were paying 18 percent interest. It’s a different situation now.
The only parallel I see is that farmers have pushed farmland prices really high, and they still continue to want to buy. It’s hard to get out of that cycle once you’ve been in an eight-year super cycle like agriculture has had.
It’s easy to think that next year, there could be weather problems leading to a poor crop, so prices could go higher. If that happens, then people may think land is not going to back off so they think they should get it while the going is good.
If there is another year of high crop yields and cheaper commodity prices, that will throw a wet blanket on the campfire. Land has backed off a little bit, but I think it could have a 10 percent correction — or even as much as a 20 percent correction. That doesn’t spell a recession. I think it just spells a healthy correction.
Cash rents and crop input costs have not declined as corn and soybean prices are lower. How should farmers approach these cash rent issues?
Communication has to happen. It’s a two-way street. With commodity prices coming down faster than input costs, the farmer has to make a decision. If it’s not financially viable for them to keep the land, then they may need to give it up.
We encourage farmers to get out in front of that and be very honest all the way through with landlords. When they’re making a lot of money, they should try to share that with landlords in some way. That can help landlords understand that it works both ways.
If a farmer has cash rent locked in and then agriculture goes into a super cycle, the farmer comes out better than the landowner during that time. But now the landowner has adjusted rent higher, which creates a situation like what’s going on now, with farms seeing bigger supply and lower commodity prices. That type of situation leads to the landowner coming out on top.
Both farmer and landowner have to stay viable in business. Both need a return. It’s about communicating that and talking about how these adjustments can be made. It’s all about the relationship. It’s all about the relationship credit the farmer has built up over the years with the landowner.
If they care about each other and know that they both need each other — because I’m a good tenant and I need you because you’re a good landlord — then there’s a good chance they can keep working together. If either one starts becoming motivated to get the upper hand in some way, then there’s a problem with that relationship.
The biggest challenge for tenants is that they often don’t have a relationship with the next generation of landowners. Many landowners are getting up in years, and a lot of times the kids are not part of the farm anymore. They might be living in Chicago or Florida and all of a sudden dad or mom passes away, and the next generation doesn’t know anything about the tenant. What they will look at is the fact that they have inherited this land and they want to make a return on it.
What do you feel would be the best lease arrangement in these times of volatile prices?
Arrangements like flex leases (which provide adjustments to the rent payment according to how that rented land yields during that particular crop year and the revenue the farmer receives for the crop) can be utilized. Everything has to be compliant with (Farm Service Agency) rules, of course.
An arrangement that establishes the base rent and then allows both parties to participate in the upside, whether that’s based on price, yield or a combination, is likely best. The farmer needs a lease that allows them to share when they’re doing really well, while not getting hung out to dry if the markets are experiencing compression.
Obviously, 50-50 or 60-40 share arrangements present some challenges — FSA challenges, crop insurance challenges. Many people don’t want to use a crop share arrangement. So likely some type of flex lease is best as long as it follows the rules around enrollment in government programs.