Crop prices, land values and cash rent predictions

Crop prices, land values and cash rent predictions

Last week's conference at ISU provided insight on financial adjustments farmers and landowners need to make.

Don’t expect higher corn and soybean prices this fall, according to a survey of farm managers, ag lenders and others attending the 89th annual Iowa State University Soil Management and Land Valuation Conference held May 18 in Ames.

Over 280 farm managers, rural appraisers, real estate brokers, ag lenders and others attended this year’s conference. And 191 of them participated in the survey, which asked for their predictions for corn and soybean prices, land values and cash rent.

WARNING SIGNS: As depressed commodity prices and plunging farm income continue to plague the ag economy, experts are advising farmers to make financial adjustments to survive the downturn.

The survey respondents believe by November 2016 corn prices will be $3.75 and soybeans $9.44 per bushel. They predict Iowa cropland values will average $7,776 per acre in November 2016 and $7,572 in November 2017. The table accompanying this article shows the survey predictions for land values and commodity prices for 2016, as well as estimates for future years. It shows land value estimates for the state average as well as for regional areas: northwest, northeast, southwest and southeast.

Warning signs ahead for farm financial conditions

A panel discussion by ag lenders and farm managers concluded that downward pressure on cash rents in Iowa will continue into 2017. Factors causing this decline include low crop prices, financial stress on farmers, tighter lending conditions and lower land values. Low prices like we’ve recently seen are likely to continue for the foreseeable future, unless something unexpected happens such as a drought in the summer of 2016.

Farmers need to lower their breakeven costs by making adjustments to their fixed and variable costs. They can do that by focusing on ways to trim crop production costs without hurting yields, by negotiating lower cash rents, by controlling machinery and equipment expenditures and by lowering family living expenses.

Adjustments will need to come in farmer spending

Participants in the panel discussion agreed that adjustments will need to be made in farmer spending, there will be more cash flow/income statement problems, and the need to communicate with landlords is greater than ever. Tenants who are heavily leveraged and who cash rent most of the land they farm have the greatest exposure to financial problems.

Cash rents move in the same direction as land values and both are connected to crop prices, production costs and net profit per acre. But cash rents tend to lag behind changes in farm income. One reason is because farmers generally hesitate to give up rented land for fear they will never get it back. Some farmers are willing to subsidize rented land with cash reserves. That can’t continue for an extended period of time.

This economic downturn differs from 1980s Farm Crisis

The panelists explained why they don’t see a repeat of the 1980s farm crisis, but they emphasized that changes need to be made in financial management by farmers in 2016 and the next few years.

The current challenge, which will likely grow worse, is a cash flow shortage driven mainly by high cash rent, machinery and equipment investments and living expenses. The current downward cycle in the ag economy is different from the 1980s farm financial crisis, the panel pointed out. That situation was driven by high land prices, high levels of debt relative to asset values, high interest rates and variable rate loans. Loan requirements nowadays are more stringent.

Another difference is crop insurance is available today that provides greater coverage and financial protection as a risk management tool. Crop revenue protection policies weren’t available in the 1980s.

Landlords’ response to soil conservation/water quality

At the May 18 conference, there were also presentations concerning climate change and the likelihood of continuing to see wet springs in Iowa. Related to that topic was a presentation by another speaker about the extensive need for more soil conservation and water quality improvement practices to be put on the land. Who will pay for these practices? Landlords or tenants?

With 55% of Iowa’s cropland being rented, it looks like landowners will need to consider investing in these practices, such as helping to pay for the establishment of cover crops and use of other conservation measures. The “financial pushback” of tenant operators is not likely to be changing without adjustments in cropland rental agreements. That was the “take away” message of this particular discussion at the conference.

You can view the conference presentations online

The conference featured discussions on six topics, with ISU Extension and Outreach researchers having a strong presence throughout the event. The overall theme was issues and implications for soil management and land valuation. Topics of conversation for the conference included:

* Evaluating Hunting Leases: Implications for recreational land values. Presented by Tom Steen, the Hunting Lease Network, Farmers National Company

* Global Economic Outlook: What does a slowing China and a strong U.S. dollar mean for U.S. agriculture? Presented by Nathan Kauffman, assistant vice president, Omaha Branch executive and economist, Federal Reserve Bank of Kansas City

* Panel Discussion on Current and Future Cash Rents in Iowa by three agricultural lenders and farm managers. Moderated by Alejandro Plastina, assistant professor and Extension economist at Iowa State University, and panelists include Jim Knuth from Farm Credit Service of America, Scott Neff from Wells Fargo Bank and Mike Downey from Hertz Farm Management

* Excessive Spring Rain Will Be More Frequent (except this year): Weather tools to manage it. Presented by Chris Anderson, assistant director Climate Science Group at Iowa State University

* Soil Fertility Management with Tight Crop Production Margins. Presented by John Sawyer, professor and Extension specialist in soil fertility and nutrient management at Iowa State University

* Cover Crops, Wetlands and Conservation Drainage: Why we need to adopt and how many acres are needed. Presented by Matt Helmers, professor and Extension agricultural engineer in agricultural and biosystems engineering at Iowa State University

The link to the presentations is register.extension.iastate.edu/smlv/presentations

For farm management information and analysis visit ISU's Ag Decision Maker site extension.iastate.edu/agdm; ISU Extension farm management specialist Steve Johnson's site is at extension.iastate.edu/polk/farm-management.

Editor’s note: Wendong Zhang is an assistant professor of economics at Iowa State University who organized the recent 89th Annual ISU Soil Management and Land Valuation Conference. It is ISU’s longest running conference.

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