Opinions and Rants
Economic insanity, a rant
I try to keep my opinions to a minimum, and rants for cranks and comedians, but while farmland is $10,000+, interest rates are up, the USD is at parity with the EURO and nearly tested it with the GBP…well, it’s not easy to keep one’s composure.
We have these empirical questions about a day of reckoning that has been deferred by a [profitable, at least] combination of rising prices, rising yields, and big government transfers (as in 2020). Land: when should we buy it, did that train actually leave the station without us, and now how should we compete to rent? Will the markets ever crash? Do we even have a clear idea of what we mean by the word “market” or “crash?” And while we’re at it, what is really going on in our own industry? Appearances are deceiving, we know well enough, but it’s hard to ignore the apparent success, or swagger at least, of various conspicuous neighbors thumping chests after yet another round of land acquisitions and fresh paint.
Has land been a demonstrably bad buy? Empirically, without a doubt. Farmland recently returns maybe 2.5% ROA. Well-managed farms? 4X that. Given the choice between buying land to farm it vs. losing that piece altogether, you make more money not farming it all than paying $10,000/acre to keep it under your management.
And marketing: for all the trouble we take to sell a crop well in advance of harvest, both for the advantage in market price and the containment of risk, for the last two years the market has played the statistical outlier and risen through harvest. So open-production speculators seem to win, or at least, not lose.
FINPACK..it’s a data sample of enough size to be statistically reliable, but is it? What sort of selection bias is baked into the farms whose data gets anonymously added to the set? Even if it’s in there, how accurate is it, really?
<end rant>
A useful answer takes a longer tour of the data which we tirelessly (because, nerds) update, parse, refine, and turn it around to predict risks and fragility.
The current situation IS fragile. If I have a recommendation other than the broken-record of getting forecasts early, particularly this year to get land rents and ’23 crop futures in perspective, it’s this: we should devote a session, with each of our clients, to a review of the macro data and debate what it means to your individual farm by creating a range of possible-to-likely scenarios to test for solvency, liquidity, and profit. FINPACK is representative, the data is reliable (law of large numbers), and if it has a flaw, it’s two-fold:
The averages hide very weak operations who in crisis could act as dominos large enough to knock into other dominos that otherwise might have stood.
The reporting farms are actually LARGER and more commercially viable than the average farm in Minnesota (average FINPACK acres = 700; total MN average farm acres = 300).
Opinions and Observations
There is an ongoing change-of-the-guard in land ownership, born by both anecdotes and demographic data. The means of attracting and keeping rented land may change. For those like yourselves who maintain the discipline of planning, who know your numbers, I am hopefully that this change will reward real stewardship rather than pure swagger or consummate glad-handing.
Higher interest signal a sea change and it is likely to be dramatic. We’ve tested the edge of the economic precipice in agriculture repeatedly since around 2015, and the missing accelerant has been higher rates. Or—the effective band-aid was interest rates at a multi-century low.
They are mostly anecdotal at this point, but I’m hearing through commercial lenders in town of liquidity issues that have prevented various approved loans from being funded. The situation is entirely opposite in rural Minnesota. But—all crises either begin as or evolve into liquidity events, they tend to spread, and it’s at that point the crisis is felt and not just intuited from the data.
Back to FINPACK: The CAPEX is insane. Big farms, growing from 2700 acres in 2011 to 3300 last year is $500,000 annually and slightly higher than the cash earned from operations. Ergo, term debt has been on the upswing with no net principle reduction. This doesn’t included any land buys. Last year (’21), it was $800,000. Words from www.aei.ag is that ’22 will see more of the same. While this group of farms have replenished working capital and shrunk their debt:assets (or perhaps you could say, the asset bubble and now broader inflation has shrunk it for them), their INcapacity to fund any land acquisitions or even significant growth in rented land with some margin for error is astonishing.
So: even as the prudent growth plans of well-run firms have been constrained or set back, take heart. Crisis is cyclical and inevitable and as Buffett said, only when the tide goes out do you see who’s swimming without trunks. The top farms out-yielded, out-priced, and out-earned the FINPACK competition, often by a considerable margin. Their time is coming [again].