Jim Knuth of Farm Credit Services of America recently spoke at Land Expo 2022 about the changing land value landscape in America and how farmers who use the land can make the most of it. He covered three topics – land values, interest rates and grain production.
The value of the land
For the first time since 2014, there has been a movement in land values. This year marks the biggest one-year trend in benchmark history, Knuth says. He says it makes sense to look at land value numbers and expect them to stabilize soon.
“Do I think this trend will continue until 2022?” said Knuth. “I don’t know, but unlikely. Some of the tailwinds are not as strong going forward. Why did all this happen? The stars are all aligned. We’ve had interest rates pushed to the bottom by the pandemic and much higher grain product prices with all the influx of government money.
Knuth says we also have the answer to what would happen if a significant amount of land came on the market – it would be taken up by willing buyers, because it’s not hard to come by. Buyers have collateral and capital and the ability to absorb market supply. But Knuth says there’s a reason this economic trend won’t last.
“The real question, as we look at the market today, is how it will continue to balance the long-term nature of the land asset with some of the short-term,” Knuth says. “How long will these margins last? How long will all of this last? I think that’s the key to moving forward.
2021 has been a dynamic year for interest rates, says Knuth. The three factors that determine interest rates and monetary policy are inflation, unemployment and consumer spending. Agriculture does not intervene much in monetary policy, despite the impact of monetary policy on agriculture.
What can the Federal Reserve do? It can increase short-term or variable interest rates. Knuth predicts that will come in what he calls modest 25-point increases in March and repeat three or four times this year.
“That means we’re going to be at 4%, maybe 4.25%,” Knuth says. “Then it’s going to reduce its bond-buying activity. In other words, it’s going to take demand or liquidity out of the market. It’s already doing that. have already seen in our 10-year cash benchmark.
However, says Knuth, a rise in interest rates does not mean high interest rates, as the industry is emerging from a year of historically low interest rates.
Another option available to the Federal Reserve is to keep interest rates the same, but extend the duration from 20 to 30 years.
“Right away you see this and you’re like, ‘Wow, this savings is double the interest rate,'” Knuth says. “That’s the point that a lot of people don’t understand. Generally, it is the term or amortization of your debt that has the greatest impact on payment, cash flow relief and restructuring.
Knuth says the best bet is to both raise short-term interest rates and extend the term to create a third option.
“Do you know what the price of maize will be in two, three or five years? asks Knuth. “No, neither do I. The goal is to take as much payback time as possible. Take advantage of all the flexibility you can get, because when times get tough, you might need it. But when things are going well, understand what you’ve done and repay that debt ahead of time. It’s a bit like having your cake and eating it too.
Grain production in agriculture
According to Knuth, corn and soybeans are not supply-driven commodities like some of their agricultural counterparts, but demand-driven. The United States used to produce over 2.2 billion bushels of corn, but now produces less than 1.5 billion. Knuth says the corn demand boom came from China, and now we see less demand from them and therefore less corn production.
After a historic spike in demand, Knuth says growers should consider their planting and sales momentum for 2022 and 2023.
“2022 is shaping up to be another profitable year,” says Knuth. “Our prices are good, but our only caution is to prepare for margin compression. I would prepare for margin compression because everything is more expensive. Fertilizers are obvious, but it’s also fuel, seeds , cash rents and machinery.
Risk management and marketing decisions are going to be very important this year, and Knuth says he expects volatility in the markets. However, he said volatility doesn’t always mean bad things; it can bring opportunities if you are ready for them.
food for thought
Knuth says there are several important lessons learned from the last time we saw this type of economic cycle that we need to bring into 2022.
“This party is also going to end,” Knuth said. “I think the key is what insights, insights, and realities can we take from the last upward economic cycle that we can apply to today?”
The first lesson concerns the cost structure. During up cycles, it can seem like farmers can afford every new machine and still break even. Thinking about capital expenditures and expansion, thinking ‘What will this do to your costs?’ can help set up a good cost structure.
“Remember, the goal of every grain farmer is to have a high-revenue, low-cost operation,” says Knuth.
Working capital is balance sheet risk management. Working capital is the first wall of defense in absorbing risk, says Knuth. If you have cash, you have the flexibility and ability to cover your own borrowings. Any business is difficult to operate without working capital.
When considering financial decisions, consider all of your assets.
“We’ve seen a lot of farmers thinking about their operation in pieces,” says Knuth. “That thought is actually wrong. This can really lead to poor decision making.
Knuth says it’s important to look at farmland per acre, or machinery equipment costs per acre, and look at your operation holistically.
At the same time, trying to understand your financial situation can be difficult. Knuth also recommends looking at your operation after capital expenditures. Thinking about what the operation will look like once the decision is made – how it will affect your cost structure or working capital, the financing it requires – can be a huge asset in deciding if it is worth it.
Knuth’s final lesson is that agriculture will continue to have a dividing line. The difference he sees isn’t in the way you fertilize, the crops you grow, or the color of the machines you use.
“Producers who increase their business and their finances are rewarded. They keep breaking up,” Knuth says. “What they do is quite simple. They spend as much time in their office as they do in their store and fields, and they spend as much time running their business as they do operating the tractor and the combine harvester.