The current commodity super cycle is marching toward a full decade of prosperity, particularly for grain producers and those who own land with minerals, oil, gas and, in some cases, water and other factors linked to the booming energy industry. Some indicate that what is below the ground can earn more than what is harvested from above the ground. The other day Dr. Jason Henderson and Dr. Brent Gloy of Purdue University presented interesting perspectives concerning land values and farm debt at the ABA National Agricultural Bankers Conference in Minneapolis, MN.
One point that caught my attention was the stages of investment by producers. Early in the boom cycle when prosperity was running high with record profits, farmers were making land investments. Checks were being written out and cash was being paid with little need for borrowing. Later in the cycle, we are observing more equity being used as a down payment for farmland and in some cases lines of credit are being diverted from operating expenses to fund long-term investments.
The second stage of investment is for equipment. One only has to look out the windshield of a Hertz rental car traveling through Mid-America to observe these equipment investments in action. Some agriculture businesses will likely not have to invest again for half a decade and they will still be able to meet their equipment needs.
The third and final stage of new investment is for lifestyle items. Investments like lake houses, airplanes, helicopters and exotic vacations are alive and well on the rural landscape due to prosperity and increasing land values. As evidence, Nebraska Farm Business, Inc.’s farm family living data finds nonfarm capital purchases for the low one third of producers, ranked by family living expense, were nearly zero. However, for producers in the top one third of living expenses, nonfarm capital purchases were approximately $330,000 in 2012. This supports points made by Drs. Henderson and Gloy that lifestyle investments are alive and well, particularly in the later stages of the boom cycle.
P.S.: Unfortunately, history finds that these nonfarm capital investments, often referred to as killer toys, sell for less than 50¢ on a dollar in a down cycle.