Farmland is the largest asset on most producers’ balance sheets. In the early 1970s, land accounted for 75%; today it is 87% of the U.S. farm balance sheet. These assets have appreciated more rapidly than other classifications of assets on the farm. Economists discuss bull and bear markets with different investments. What are three potential bears to farmland values, the largest asset on the farmers’ and ranchers’ balance sheets?
Baby bear would be a prolonged decline in commodity prices, particularly grains. First, it would take a few years for the psychology to take effect, so devaluation would not be immediate. Some devaluation of farmland is taking place on the east and west coasts and particularly Florida, Arizona and California. The bullish values are still strong in the Midwest with the exception of recreational farmland.
Papa Bear would be an increase in interest rates similar to the 1980s. The Federal Reserve initiatives to slay inflation at the time led to devaluation of land, which in turn exposed deficiencies in management ability, profitability and cash flow. Granted, inflation currently is not prevalent, but large federal debts that are foreign financed can lead to perceived risk, which could hike the cost of money. This, in turn, would reduce profit margins, potentially creating a bear market in land.
Mama Bear is still in the woods hibernating, but she is potentially hungry and dangerous. Mama bear is potential shifts in tax laws ranging from tax exchanges to estate taxes to higher federal, state, and local taxes.
These factors along with Bigfoot, the black swan event, can change investment patterns and devalue an asset classification very quickly.