There's no question that the world has changed forever and will take years, if ever, to get back where we were five years ago. Like it or not, we have to manage within new rules and have to adjust to this changing climate. Here are some of my thoughts.
The impact will not likely be severe. No question the bull market is over, and in most areas of the country farmland prices have already corrected 10-15% from the absolute top.
But we will not see a sharp decline in land prices such as occurred in the housing market or as occurred in the crash of the 1980s. Both of those crashes were fueled by debt, and the 1980s farmland crisis not only had large debt, but extremely high interest rates.
Today, the last two years of the bull market in farmland have not resulted in a large buildup of debt, and interest rates are very low. Therefore, even if we go into worldwide deflation, it's my opinion that land prices will likely not drop anymore than another 10% from where they are now — and that could even be pessimistic. What will likely happen, however, is that next year cash rents will soften and then farmland sales will slow down appreciably.
Many of you are trying to decide whether to stay with short-term variable rates or lock in longer-term rates. The decision is even more difficult with the near-record spread between variable rates and long-term rates.
Even though long-term rates are higher than variable rates, in looking at history, both are extremely low. Eventually, and it may take three to five years, the amount of money the Federal Reserve is pumping into the economy and the amount of money they are borrowing will lead to higher rates — 6-7.5% on a historical basis is low.
As long as the rate you're locking in allows you to cash-flow your farming operation, then seriously consider locking in the longer-term rates rather than staying at variable rates. Four to five years from now, I think both will be significantly higher.
In many of my speeches in the last few weeks, it seems as though a lot of people are confused about why the value of the U.S. dollar continues to rise. The value of any currency is a relative situation. Even though the U.S. economy is not doing well, the rest of the world is not doing any better. Even in light of current events, the U.S. economy and the U.S. dollar are still the most stable environments and assets in the world. There is a flight to the U.S. dollar and it will likely continue.
These are critical times and decisions need to be made. Avoiding decisions and putting them off is no decision at all — and could prove to be costly. Manage your risk and even though it is an old saying, it's important to do so at this time.
Grain and livestock prices will stabilize and input costs are dropping to start matching them. Still, 2009 could be a financial squeeze for many producers, but by 2010 the profit spread will come back and farming and life will go on.
Richard Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. Fora trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.