In recent columns we have discussed a range of topics and strategies that were learning experiences from the latest financial crisis. While the Monday morning armchair quarterback is always undefeated, sometimes it is good to glean some thoughts on the other side.
Yes, cash, liquidity, risk management, sound use of financial records and variance analysis in particular, was discussed as a formula for a winning game plan. Now let’s go beyond those factors and discuss some new players.
One perspective learned in many areas of the country is that land values can and will decrease. For the first time in 21 years, the most valuable asset on the U.S. farm and ranch balance sheet has declined by approximately 3%. Housing real estate experienced approximately a 30% decline in value, and commercial real estate decreased by approximately 40%. While the decline in land values is not as large as in some other industries, it has changed economic game conditions.
In the past, farm real estate appreciation covered up flaws and mistakes leading to cash flow and profit losses. The losses were then further disguised through refinancing operating losses into term debt. Another strategy was to sell real estate, generating non-recurring income, to pay off the losses. Both strategies have now abated as lenders have become much tighter on lending standards and the demand for real estate has slowed. On the horizon, game conditions could really change if long-term interest rates increase, resulting in large declines in real estate values.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.