Spring 2019 - Fewer Unknowns, but still no clear direction!
Starting in 2016 through last fall I wrote about the stability in the farmland market in terms of values and rents. This trend continued lengthening the sideways market to 3+ years. There remain unknowns, albeit fewer than last fall, that will impact the market. The primary being where does the US end up in trade agreements. There are fewer questions since the 2018 Farm Bill is complete and it appears interest rates are stabilizing. So what will 2019 offer?
I suggested last spring we were at a tipping point in farmland values based on the outcome of the 2018 year. Farm incomes were down due to lower commodity prices but higher yields combined with the Market Facilitation Payments (MFP) helped producers have an “ok” year. Land rents for 2019 remained consistent with 2018 and the early results of our 2019 land sales also indicate support at the current prices. Here are some thoughts on the major farmland issues in the Corn Belt this spring.
Major Issues Facing Agriculture Today:
2018 Farm Incomes: Last year ended with good yields, below average prices due to the tariff wars and then Congress authorizing the MFP’s as an offset. The MFP’s provided needed cash near year-end and allowed many producers to manage a small profit. Overall US net farm income was very low at $66 B in 2018 and for some, there was further erosion of working capital. Clearly the tariffs had a negative impact and continue to do so, especially the lack of an agreement with China.
Supply of Farms for Sale: The number of farms for sale remains slightly below average. The last six months saw an increase in farms offered which is more in line with historical averages. The low supply remains a supportive factor for land values.
Interest Rates: There were multiple increases in 2018 as the general economy hummed along. So far in 2019 there are no increases and the Fed is talking stability for the rest of the year due to the weakness of the stock market toward year-end and the larger impacts of the trade issues. Historically interest rates are still near the low end of the range and generally supportive of farmland values.
Trade Wars: They continue and agriculture eagerly awaits approval of the USMCA and an agreement with China. . In terms of the unknowns, these trade agreements are the most significant factor going forward and remain a bearish factor to land values.
2018 Farm Bill: This bill was passed in December and implementation will occur over the next six months. It is largely viewed as neutral to agriculture as the former programs continue, with modifications that make them more user friendly. Crop insurance maintained its support subsidy which is most important.
Lease terms: At our semi-annual company meetings we discussed the lease survey results. Halderman managed farms largely saw lease terms remain the same. There were more changed to cash-flex leases to mitigate risk for the farm tenant and allow the landowner upside if 2019 turns out to be a good revenue year. Outside of some tweaks to the terms of cash flex leases we saw leases consistent with 2018.
In conclusion, trade agreements and the summer weather will keep farmers and landowners watchful. Keep the “long view” and be comforted knowing that agriculture is a sound and safe investment, as it has been for decades. Cash yields range from 2.5-3.5% with very low risk. When you add in historical farmland appreciation at 4-5% it is an appealing investment.
Ask an expert for assistance! Halderman offers 89 years of vast agricultural experience and our staff knows their regions very well. Through our growth and changes, the company philosophy remains the same as it was in 1930, to meet client goals, solve problems and prepare for change.
We will take the time to work with you and provide you with options for your property. Look to us during your time of transition. We appreciate the opportunity to work with you on a farm management project or sale of property, acquisition, appraisal or a real estate auction.
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