Road Warrior

Year End Review: Farm Land, Rural America Wealth, Mother Nature

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I am bringing to a close another year of traveling the air and roadways of North America. It is time to reflect on my travels and interaction with some of the greatest lifelong learners who seek to better themselves in the challenging world of agriculture and global economics. Here are some of my reflections and perspectives, based upon continued work and dialogue with people across the continent.

 

Farm and Ranch Land

In 1996 at Husker Harvest Days in Grand Island, Neb., I cautioned a group of producers to be careful not to go out on a limb when acquiring farmland. I was reminded of this comment by a producer in Wahoo, Neb., just recently. Who would have known at that time that North America would be on a 25-year bull market run on land? However, I cautioned the same producer that 34% appreciation in land values in Nebraska last year was not sustainable in the long run. A tell-tale sign American agriculture may be long in the bull land market is fewer producers writing checks out for $2 million for land. More outside investors are dabbling in the farmland market and even marginal land is bringing a premium price. The correction in farmland will most likely occur in the upper Midwest with less deflation on the East and West Coasts, and southern part of the U.S.

Wealth to Rural America

“What recession?” is the response of many of the 60 million people living in rural America. They are correct because many in rural areas have not experienced the recession. This is due to the rural economy’s linkages to rapidly growing economies in emerging countries; federal policy on biofuels; accommodative Federal Reserve policy that has maintained a low value of the dollar, encouraging exports; and low interest rates. The symbols of wealth can be seen when driving in my Hertz rental car in the Midwest. I have been seeing and hearing about new homes, tool sheds, RVs and helicopters owned by producers, particularly in the grain belt. Behind the scenes, more families and rural communities are being pulled apart and stressed by the new-found curse of earned profits and paper wealth due in part to the appreciation of land values.

Mother Nature

Yes, she still in control. Mother Nature in North America and abroad has been the game changer leading to a wide variation in commodity prices. Personally, my view out the windshield in recent months is not too promising for next year. The water levels in wells and rivers are at record lows in major production belts throughout the world, which could be a paradigm shifter for agriculture. Any risk management plan in agriculture must incorporate global weather, but include local conditions as well!

Margin Compression

Margin creep is occurring even in the grain industry. Higher cost of inputs and fixed cost of purchasing land as well as high cash rent is occurring late in this cycle. Every producer needs to focus on margin management. Margin killers are higher real estate taxes and higher income taxes regardless of the tax bracket for 2013 and 2014. Producers are now doing more equity financing, i.e. using equity as a down payment when obtaining money for operating needs, land acquisition, and growth.

Shift From Livestock To Grain

Fifty to 65-year-olds are transitioning from livestock to grain enterprises because of the profit potential and lifestyle. Demand destruction is taking place in certain areas as livestock farms find it is not profitable to milk cows and feed hogs and cattle. Also, the “r” word, regulation, is becoming a burden in the livestock industry, but also in the agricultural industry as a whole as more lawmakers and Americans in general become disconnected from agriculture and nature.

 

Observations from the road and the sky:

  • Fewer yard lights in rural America
  • As farms become bigger and more consolidated, there is a talent shortage for agriculture and business expertise in general
  • Young people rediscovering agriculture
  • Some ag schools are reinventing and orienting toward commercial agriculture, while others are disappearing

I have had fun traveling all around the continent this year, meeting many of you from coast to coast. My wife, Kendra, and I, as well as Angela and Alicia, wish you well in the New Year. I’ll have more to say after the first of the year, as we recharge our batteries during the Christmas season.

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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