Year End Thoughts On The Us Farmland Market By Benedict T. Palen, Jr.

These are precarious times for the US farmland market.  I have previously written about the headwinds that it was facing from large crop inventories, trade and tariff issues, and rising interest rates.  None of the uncertainty has diminished.  In fact, the longer these issues linger, the greater the concern about this market.

A factor that looms large, and which was not on the radar screen, say, 15 years ago, is the large amount of land owned by investment groups, along with the amounts of “dry powder” that some of these funds have.  It’s important to keep in mind that the newness of many of these funds means that they have not gone through a significant adjustment (downward) in land values, nor have they had too much experience with historical annual cash returns from owning farmland.  

Will the funds be buyers, or will they be sellers?  That is a question that is impossible to answer right now.   And the answer will likely vary by region of the country, with possibly more pressure on these funds in the broad acre crops areas, and less so in the permanent crop areas.

The issue of the direction of some of these funds also has the backdrop of rising yields on interest bearing financial instruments, and a falling stock market. 

It would appear that, for the savvy buyer who understands the cycles of the farmland market, and who has “patient capital,” there will be opportunities during this market reset.   This requires very careful analysis of a farm, the area in which it is located, and, of course, good knowledge of the macro factors that I have noted.

Farm Safety Considerations By Benedict T. Palen, Jr.

Farming is widely considered to be a very dangerous occupation, and according to some statistics, as dangerous as construction.  That being said, it is worth thinking about the differences in safety awareness and accident protocols on a typical farm and construction site.  Having had experience in both industries, the differences can be somewhat surprising.

For instance, on most construction sites, one would find personnel who have had various levels of safety training, ranging from basic first aid, up to CPR.  It is typical on a construction site to have multiple first aid kits, along with protocols for getting injured personnel to the nearest hospital, to accident investigation procedures.   Periodic safety training classes are given, and having trained personnel and a written safety program not only help to ensure a safe workplace, but they can result in lower insurance premiums for the company.

Many farms, even the larger ones, do not seem to have the same level of safety awareness or training.    For instance, thinking about the last farm that you have visited, do you know how many personnel are trained in CPR? Do you know how many first aid kits are in vehicles and buildings?  Do the personnel know what to do in case of an accident? Is there a written safety program?

Sadly, the answers to many of these questions might be surprising—in a negative way.   The safety culture that is often engrained on a construction site is frequently lacking on a farm, especially ones with small numbers of employees.    Given the difficulties in attracting qualified labor to many farms, it would seem that having a safety culture would be a “hook” for bringing capable employees into a farm situation. 

Working As A Volunteer For A Food Bank By Benedict T. Palen, Jr.

Here in America, many people are used to having all or most of what they want when it comes to food. For those who are reasonably well off, it may not occur to them that the lack of enough food is a daily issue for a fairly size able segment of the population.   Many of those folks in need rely on food banks for regular nutritional needs.

It is both a humbling and satisfying experience to volunteer at a food bank, and something that I would recommend, without hesitation, for people who can find 1-2 hours a week to help out.  Let’s be honest—we can find that small amount of time if we really want to make a difference.   Put aside the focus on oneself and do something for others. You will find it to be highly rewarding.

As a long time volunteer with charitable organizations, the memories that I will carry with me for all of my days come from the simplest acts of kindness—handing packages of food to those in need, and seeing their faces brighten up, and receiving a heartfelt thank you from them, or helping to sort food received in a food bank warehouse so that quality products were provided to its customers. 

This is simple stuff. It falls into the category of the little things in life that I have written about elsewhere. But it is these little things that help to give us meaning in our lives, and help us to maintain a perspective as we go about our daily routines.

Volunteers are always needed at food banks and other charitable organizations.  Check them out, and no doubt you can find one where there is a good fit.   You will find that you get back far more than you give of your time.

What Direction For Farmland Prices? By Benedict T. Palen, Jr.

It is clear that there are challenges for farmland prices, and that is causing concern among all sectors of agriculture.   A layer of uncertainty that was not much of a factor, say, 10 years ago, is the degree of capital put into this asset class by outside investors, and the fact that a large amount of dry powder resides with some of those investors, waiting to see where the market trends.

It would be fair to say that investors who put money into farmland over the past ten years have enjoyed outsized returns—as compared to long term historical averages.   And the question is whether that capital will still be attracted to the asset class now that returns are trending downwards, and much more in line with historical averages.   With the recent increases in yields on Treasury securities, one has to wonder whether farmland will maintain its appeal with some investors, and what impact that might have on land prices.

For most areas of the US, local farmers, and those closely associated with farming, have been the primary buyers of farmland.   That said, there are areas where investors have tended to dominate the market, especially on very large tracts of land.   With the diminished current returns on farmland, and the softness in the long term trends for land prices, will those investors abandon the market?  If so, what impact will that have if the liquidity aspect of the market is sharply reduced?

These are questions that will be addressed in later blogs. Suffice to say that anyone considering an investment in farmland has a number of things to consider that were not of significance 10 years ago.

Developing A Strategic Plan For Your Farm By Benedict T. Palen, Jr.

It is a common practice in corporate America, in companies large and small, to have strategic plans to guide the business over, say, the next five years.   These strategic plans serve as road maps for each part of a company, and they are revisited, say, once a year, for updating, and progress reviews.

How many farmers have a strategic plan? Anecdotal evidence suggests that the percentage is well under 50%.  Reasons for not having a plan run the gamut from believing it is unnecessary, to concerns about cost or the amount of time that may be required to put one together.

From my perspective of 40 years in agriculture, a strategic plan is a key for helping to ensure that a farm can deal with the headwinds, cycles and opportunities that have been persistent features of agriculture for decades.    One example—of many—is that factors such as GMO crops, precision agriculture, and blockchain, which are in the forefront of today’s agriculture, were just blips on the horizon not too many years ago.  In other words, change is a constant, and a well done strategic plan is a way to deal with that inevitability.

Understandably, farmers maintain a very intense focus on what is right in front of them—their crops—throughout the growing season.   But it is important to step back, and see the big picture, because it is from there that elements of a good strategic plan will emerge.   I recommend that farmers engage a consultant who can offer a deep and thoughtful perspective on the farm business, someone who knows which questions need to be addressed. 

These can run the gamut from how operating decisions are made, to company culture, succession planning, capital structures, and marketing programs—just to name a few things on a long list.

The consultant will take the time to understand the farming operation, and to observe its processes, and its people.  This is an effort that should take place over a period of several months so that, for instance, a crop is followed from start to finish.  With the knowledge gained on a specific farm, and coupled with the consultant’s overall knowledge base, the ingredients of a good strategic plan can be developed, and discussed, along the way, with the stakeholders.

Steps To Precision Agriculture By Benedict T Palen Jr

After zone mapping a field with the VERIS machine, it would be worthwhile for a farmer to compare the results with NRCS soils maps.  In many instances, those soils maps are more than 40 years old, and their margin of error could be plus or minus five to ten acres—as compared to sub inch accuracy with GPS devices and today’s high tech tools for agriculture.

 

The soils from each of the zones in a field should be sampled, and then lab results obtained that will provide details on nutrient levels, but also for organic matter, pH, and soil texture.  It is important to know the inherent fertility in a particular soil, the water holding capacity of that soil, and the potential for enhancement of crop yields on each soil type.

This precision soil testing will likely involve hundreds, if not thousands, of soil tests on a typical farm.  While there is a cost associated with this task, these are some of the best dollars that a farmer can spend to gain an in depth understanding of the “bones” of the farm.  

Further, it will then be possible to do a cost/benefit analysis for the precision ag tools needed to implement a changed farming program, along with the change in inputs needs (more in some areas of a field, less in others), so that a precision farming budget can be developed.   In those cases where a farmer seeks additional financing to make these changes, the level of detail produced from the zone soil mapping, and the subsequent financial analysis, can be a persuasive tool for lenders.  Likewise, on rented land, with leases where there is landlord participation in certain costs, the same could be true as far as getting some financial participation from the owner for these improvements.

Some Thoughts on the Current Investment Climate By Benedict T. Palen, Jr.

There have been some serious headwinds in US agriculture over the past 3-4 years, including lower farm incomes, large carryover stocks of grains here and around much of the major producing areas of the world, and unfavorable trends in the costs of most crop inputs. 

This has come at a time when billions of dollars have been raised by large funds to invest into agriculture here, and in other countries.  In addition, more recent events of concern were earlier this year, when the Trump administration created major concerns in many sectors of the economy by seeking major changes in tariff arrangements with other countries, many of whom are major purchasers of US farmers’ crops, along with the recent rise in bond yields, which are often used as a benchmark by some investors when considering the income potential from farmland. 

All of these factors beg the question of what direction a prospective investor, or current landowner, should take with respect to US farmland.    The answers are not easy to ascertain.   However, some distinctions can be made.   

The ups and downs for farm incomes and carryover grain stocks, as well as trends in crop input costs, are not particularly out of the norm. In fact, they are in line with the cyclicality of US agriculture and the mega factors that influence it.   Many investors and landowners understand the cyclicality, and build that into their financial modeling.

The tariffs are, however, an entirely different story.  They have the potential to adversely impact the world market share of certain grains for US farmers, and that is likely to mean that competitors, whether South American or eastern European countries, will step in and pick up the slack.  That could mean long lasting negative impacts will be felt in the US.  

Many lenders and farmers are expressing concern, and the government’s so-called “aid” to help US farmers is nothing more than borrowing money from one government pocket to put it into another for distribution to farmers.   

There can be a fine line between being opportunistic, and cautious.   Here, at this time, we have the added factor of several billion dollars of dry powder from institutional investors looking for farmland deals in the US.   Each situation is different, and of course there will always be those publicized farmland sales that are suggested by some as evidence that the market is “strong,” or “stable.”   From the perspective of someone who has been in this market for 40 years, caution is the byword.  

There is more downside risk at this time—due to the tariff talk—than we have seen in the past ten years.   If I were a prospective seller, I might take advantage of “an offer I couldn’t refuse.”  If I were writing a check to buy a farm, though, I might just want to keep that money in the bank until I saw how all of this settles out.   These tariffs are more than a short term cyclical event; they are fundamental to US agriculture.