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Farmland Values and Commodity Prices

 

Oh, the joys of technology! Since October of last year, weather issues have resulted in the cancellation of about 10 days of speaking engagements. Last week, FAA furloughs caused delays at the airports, as they bicker with the government. Videoconferences and webcasts from my corner office at the Virginia Tech Corporate Research Center are becoming much more appealing than travel these days!

Speaking of webcasts, a banker from Iowa asked an interesting question during a recent webcast. He wanted to know my thoughts on how much farmland prices would be adversely affected in 2014 and 2015 if prices for crops drop below breakeven levels, for example $3-4/bu. corn. Let’s examine this issue that is top of mind with lenders and to a lesser extent with agricultural producers.

First, one year of crop prices below breakeven level will most likely have very little impact on land values. Good managers have risk-management programs that use forward pricing, options, or a combination of risk management strategies. Others have protected profit through crop insurance. Some outstanding managers have cost efficiencies that may result in minimal losses at these lower prices. Other producers have built financial fortresses of working capital reserves or strong equity to position for the eventual correction.

The farmland price correction could occur quickly in areas dominated by aggressive, growth-oriented agricultural producers. If they have financial issues, it may result in large acreages in the area to come onto the marketplace all at once during a correction, driving prices down.

A correction in farmland prices will most likely require multiple down years at prices well below breakeven to kick in the psychology of the marketplace. This, in turn, will suppress the “animal spirits” or the aggressive investment strategies of a majority of the buyers.

A key point to keep in mind is that land values typically overshoot about 20-30% on the strong side of the cycle and overcorrect by a similar percentage on the downside. Remember that approximately 80% of all investment decisions are not objective, but subjective.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]