Lower commodity prices have brought tight margins to farmers around the country—and last year farm income was the lowest since 2002. However, farm economics works in a cycle and land values are beginning to adjust.
“The economics of crop production drives land values,” says Brent Gloy, Ph.D., agricultural economist with Agricultural Economic Insights. “These have fallen in recent years, so we can look for land values to follow.” In this episode of Profitability Matters, Gloy shared his insights on 2015 and 2016 farmland values, negotiating rents and financing tips for a profitable 2016.
- Land values and cash rents are starting to soften to reflect the lower economic returns that we’re seeing in agriculture.
- Farmers looking to purchase land should consider the long-term returns on the investment.
- Farmland produces income and it will typically be profitable if the holding period is long enough.
- However, land can be so overpriced that it takes too long to be worth the investment—do an economic analysis to see how it would work in your operation.
- Desirable land may come available in a year or in 10 years, and growers should have a plan in place for when the opportunity presents itself.
- Save money so you have the resources available and aren’t caught unprepared.
- Put a dollar value on the emotional value of land, for example, “I’m willing to pay $X because it’s next to my farm or because a relative once owned it,” so you don’t let emotions drive the economic decision.
- This is a key time to consider different rental agreements for 2016.
- Be open with your landowner about the economic situation. Ask, “With this current outlook, can we agree on a little lower base rent so I can make money in this environment?”
- Farmers and landowners may consider flex leases, which can allow a lower rent while sharing some of the gain if yields turn out better than anticipated.
- Reconsider financing during low commodity prices.
- Farmers should keep an eye on their liquidity and make sure they have cash available to pay for expenses and potential surprises.
- Paying cash up front and avoiding mortgages can be a mistake during tighter margins because doing so can lead farmers to take on more debt than they can handle.
- Read more from Gloy in the January issue of Illinois Field & Bean, and check out this new article “The 12 Questions Production Agriculture Will Face in 2016” at Agricultural Economics Insights.
Want to learn more? Stay tuned for the next episode of Profitability Matters, and read our previous posts for additional insights into farm profitability: