Although farm finances are tight for the fifth year in a row and the cash flow outlook is grim, farm tenants are generally honoring their leases this spring, real estate experts said, and land values appear to be holding steady.
When most cash rents were paid on March 1, the coronavirus was not seen as that menacing in farm country. It wasn’t until the second week in March when major events started to be canceled that people worried about widespread ramifications of the coronavirus, said Doug Hensley, president of Hertz Real Estate Services in Nevada, Iowa.
By then, farmers had already locked in their spring financing. Even in hard-hit areas reeling from last year’s wet year, many farmers eked out a small profit in 2019, said banker Nate Franzen, president of the agricultural banking division at First Dakota National Bank in Yankton, South Dakota.
“Even after the weather challenges and prevent plant acres we had last year, 78% of our clients had an operational gain in 2019, which was the same as the past two years,” Franzen reported. Adding in the cost of interest, taxes and depreciation, “61% of our clients had an earned net worth gain, which is slightly less than the 64% of our clients who had a positive net worth gain the past two years. But that’s still remarkable considering our production challenges last year.”
While there have been rumors of land coming up for rent last minute, it’s far from the norm thanks, in part, to sizeable government payments in 2019.
“In Kansas, 55% of farmers’ and ranchers’ net farm income in 2018 came in the form of government payments. And for 2019, we estimate that to be 60% of their net farm income,” Kansas State University ag economist Mykel Taylor said. Government payments include the Market Facilitation Program, farm bill programs and disaster assistance.
Last week, Agriculture Secretary Sonny Perdue announced a program to provide $16 billion in direct payments to farmers and ranchers, and while many commodity groups expressed gratitude for the assistance, many think more will still be needed.
For more on USDA aid, please see: https://www.dtnpf.com/… .
That package also didn’t provide aid to the ethanol industry, which was hit hard by the dueling demand drop from the virus outbreak and the supply boom from Russia and Saudi Arabia’s oil price spat. On April 9, USDA cut corn use for ethanol by 375 million bushels (mb) in its World Agricultural Supply and Demand Report.
“We don’t know the full impact of that yet,” Hensley said. However, crop insurance will help row-crop farmers manage their risk this year. “We’re fortunate that the spring pricing period for crop insurance occurred in February. While protecting $3.88 per bushel for corn and $9.17 for soybeans is slightly less than last year, and the revenue protection won’t set records, it will help farmers manage their risk this year.”
He added that details and amounts of other government programs for agriculture are still to come.
“Cash flows and crop prices often look horrendous this time of year,” Hensley added. “But we often see a market rally between mid-May and mid-June. And we can backstop [sales on a price rally] with crop insurance. While insurance and/or government payments are not how farmers want to receive funding, it looks like the support is there.”
Franzen said he’s always cautious in the springtime. “I am careful not to get too optimistic or pessimistic this time of year. We have time for a weather scare to affect prices. We don’t know what the government programs will be. We need to be patient.”
Hensley said there’s a natural pause in the farmland market this time of year.
“Farmers are busy in the field. There’s normally not much focus on land sales during planting. So, we have time for a more measured response in farmland,” Hensley said. “Had this COVID-19 situation happened in August or September, it would have created more chaos in the farmland market.”
Farmland sales are still being completed this spring. Hensley reported sales in the past 30 days of $10,750 per acre on 120 acres, $10,500 per acre on 240 acres and another sale of $10,600 per acre.
“Land buyers are looking at a long-term investment. Interest rates are low right now, alternative investments are giving people heartburn. If it’s the right location and highly productive, you will find buyers compete for farmland,” Hensley said. “And there’s still a lot of net worth out there. Remember, 80% of Iowa farmland is owned mortgage-free.”
However, the farmland market still relies on fundamentals, which means there will be keen interest in how supply and demand plays out this year.
“Even in this time of uncertainty, one thing the pandemic has done,” Franzen said, “is that people are reminded of the basic things in life, and how food and agriculture are awfully important.”
Elizabeth Williams can be reached at email@example.com