Margins, cash rents and land values

In my travels conducting seminars, speeches and schools, margins, cash rents and land values appear to be major questions for people connected with the agriculture industry.  In order to examine each of these topics in detail, I will use examples from the recent Graduate School of Banking at Colorado (GSBC) course.  As background, the school is in its 65th year of this three-year educational program for bankers and regulators from over 25 states.  I have taught this course in global economics and agricultural credit for 24 of the 65 years. Polling software now allows us to engage the attendees interactively to enrich the educational experience, as well as to prompt some important questions and feedback.  At GSBC, we discussed cash flows and margins, land values and cash rents in detail. 

To start our discussion at Colorado, we asked the bankers and regulators to describe the current status of cash flows and margins with their agricultural customers and overall portfolios. Surprisingly, 48 percent indicated negative margins and cash flow.  Of those customers, many are in the grain industry without income diversification such as livestock to balance out the operation. Approximately, 30 percent indicated stable margins, while 23 percent were on the positive side of the ledger. My hypothesis is that this 23 percent represents customers primarily in the livestock and beef sectors, not exclusively grain.

Participants were next asked to indicate what the value of farm land in their area would be in late 2015 to 2016. Nearly 50 percent stated that land values are expected to drop by 1 to 10 percent, while just over one quarter of the participants indicated that values would be stable.  At each end of the spectrum, 15 percent felt that land values would decline by more than 10 percent, while 12 percent stated that land values would increase by up to 10 percent.

Looking at our last major variable, what can land owners expect at the negotiation table for next year?  Well, if the bankers are any guide to next year’s values, it will be an interesting year as the drive for profits will be priority number one for most producers. Of the responses, 30 percent indicated they expect cash rents to decrease by one to 10 percent. Nearly one-quarter of bankers expect rents to decrease 10 percent or more. One-third felt cash rents will remain stable in their area, and approximately 15 percent of polled respondents indicated they expect to see an increase up to 10 percent in cash rents next year. Again, farm enterprises and local economies with livestock operations probably influenced the response of those expecting an increase.

While this polling is not a random sample or academically valid, these results are from individuals currently working with producers and other agribusiness professionals.  I believe this is a probable indication of the numbers we can expect in 2015 and 2016. Reactions to these responses will be varied, of course, depending on where your interests may be in the agricultural industry.  Each of these variables can individually or collectively bear significant impact on your operation.  Favorable or not, additional information can be helpful in determining your next course of action. 

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