Falling ag land values mean trouble for farmers
While the lush green sea of wheat filling Kansas fields will turn gold in a few weeks, beneath the comforting cycle of planting and harvest lies big trouble for the state’s farmers and rural communities.
The value of farm ground here and across the country is beginning to fall. That drop can cause havoc for the farmers and ranchers who have borrowed a record amount of debt, as well as the banks that made loans to them and the governments that tax them.
It will almost certainly lead to more farm foreclosures and ownership consolidation across Kansas and the country. How much is impossible to know, because it is just starting to unfold.
But, so far, no one is saying that a return to the mass foreclosures of the 1980s farm crisis is likely.
The state’s farm economy produced about $8.5 billion in 2015, about 6 percent of the state economy, according to the U.S. Bureau of Economic Analysis.
At the moment, farm foreclosures, loan delinquency and debt-to-asset ratios are near record lows, but conditions are eroding.
A recent forecast by Mykel Taylor, a farm economist at Kansas State University, calls for a drop of 30 to 50 percent from the peak as land prices return to their long-term trend. Others are predicting somewhat less of a drop.
Brokers say the decline has already started, with the price for prime Kansas crop ground down about 10 percent from its peak, while marginal crop land has fallen twice or three times that.
Pasture land has not fallen yet, although it is expected to.
How fast prices deflate will dictate the level of pain, Taylor said.
People keep asking: ‘Is this like the ’80s? Is this like the ’80s?’ I don’t know, but it’s going to be bad.
Mykel Taylor, farm economist at Kansas State University
“People keep asking: ‘Is this like the ’80s? Is this like the ’80s?’ ” she said. “I don’t know, but it’s going to be bad.”
Bill Carp farms more than 1,500 acres in northwest Sedgwick and Pratt counties as well as the remnants of the family farm a mile north of the Sedgwick County Zoo amid lake homes and soon-to-be lake homes.
He’s not worried about his own situation. He has been conservative and kept debt down, but he said some of his now overextended colleagues are getting nervous.
Each farmer is slightly different, Carp said, with a different mix of crops, costs, financial savvy, land leases and savings – and different debt levels. What they all share is shrinking cash flow to cover their debts.
He said that land he has seen at auction recently was down only slightly. Given the value of the crops now being produced from that land, it might earn just a 1 or 2 percent return, not including the interest on the loan to buy it – in other words, it’s a money loser.
The fact that there are still farmers out there who are bidding up prices at auction means they’re probably in good financial shape, he said, and can afford to buy land at a loss.
“They’re thinking: ‘Well, I’ve always wanted that quarter-section’ and wind up bidding against the guy on the other side who also had his eye on it for years,” he said.
That may not last, Carp said.
Farmers are starting to talk about not being able to afford land that comes up for sale, he said. If they start having trouble making payments for land they did buy, the key is the relationship with their bankers.
Traditionally, ag bankers are slow to seek foreclosure, preferring to save a long-term customer. Foreclosure also can devalue nearby land, worsening the whole situation.
“When (bankers) start taking it and putting it on the market, that’s when you see a full-out collapse,” Carp said. “I don’t think we’re close to that. We sure could see some land devaluing, but we’ve had four or five good years of farming here and there is a high percentage of farmers in good financial condition, and two or three years isn’t going to cause a collapse.
“But it could slowly start eroding, and, three our four years from now, things could look a little iffy,” he said.
Chain of events
The decline was inevitable after nearly a decade of strong price increases, economists say, because land values are driven largely by the profitability of the crops and livestock that can be raised on them.
The price of wheat, corn, grain sorghum and soybeans has fallen for more than two years and is now about half of what it was during the glory years of 2010-14. And last year, cattle ranchers also saw their prices drop sharply.
40% decline in net farm and ranch income in 2015
As commodity prices go, so goes income. Net farm and ranch income fell nearly 40 percent in 2015 and is forecast by the U.S. Department of Agriculture to fall about another 3 percent this year.
Farmers have already slowed the buying of equipment, which triggered slower sales at ag equipment dealers and layoffs at ag manufacturers, such as Agco in Hesston.
Next up is land values.
Falling land prices make it harder for farmers to borrow money, because their land is their biggest asset and the collateral for a loan.
Farmers borrow not only long term to buy land or equipment but also short term to operate. Farmers and ranchers typically spend hundreds of thousands of dollars a year on fertilizer, chemicals, fuel, seed, livestock, equipment, land rent and debt payments.
That’s why most of them borrow money to operate during the year and pay that loan back after they sell their harvest.
The volume of loans to cover operating expenses rose to historically high levels in the fourth quarter, according to the Kansas City Federal Reserve Bank’s Ag Finance Databook. And more operating loans are being collateralized with real estate.
Kansas State ag economist Gregg Ibendahl said in an online presentation for AgManager that a debt-to-asset ratio below 30 percent – in which the bank owns 30 percent of the farm’s value – is generally considered safe by banks. Central and eastern Kansas farms averaged a debt-to-equity ratio of about 20 percent in 2015. Western Kansas farms were at about 16 percent.
As a comparison, during the height of the 1980s crisis, debt-to-equity ratios averaged 47 percent across eastern Kansas, 43 percent in central Kansas and 33 percent in western Kansas.
But as 2016 turns into 2017, conditions will start to worsen. It helps that this year’s wheat crop in Kansas went from bad to average with recent rains.
Collateral damage from falling land prices includes small rural banks that do a lot of ag lending.
It’s still very early. There have been few loan delinquencies or foreclosures. But the Kansas City Fed first-quarter assessment of the ag sector reported that the performance of agricultural banks softened in the fourth quarter.
American AgCredit’s Greg Reno said his bank has long experience with the ups and downs of ag cycles. He encourages farmers and ranchers running into cash flow problems to come in early when they still have a lot of options to stretch out payments or find other collateral.
He doesn’t expect a crisis for his bank. The bank didn’t push loans too hard when times were good, and it won’t panic when farm finances are bleaker.
We’re putting on our courageous boots.
Greg Reno, regional vice president American AgCredit
“You have to be fearful when things are good and courageous when things are bad,” Reno said. “We’re putting on our courageous boots.”
But, for rural governments, ag land devaluation won’t be a problem for a few years.
The tax value of the land is still rising because of the state’s formula. The state sets assessed value of land as an eight-year average with a delay of two years, so this year’s valuation reflects the average of 2007-14, said Roger Hamm, deputy director of the Kansas Department of Revenue’s Division of Property Valuation.
The assessed value of the state’s ag land rose 16.5 percent in 2015 and has risen 70 percent since 2010. Hamm said the valuations will continue to rise for at least two more years.
That has provided a nice counterbalance to the plunge in oil and gas property valuations for much of western and central Kansas. Many counties have had to cut budgets and raise taxes last year and this year to compensate.
Nathan Kauffman, assistant vice president for the Kansas City Fed and an ag economist, expects delinquencies to start rising this year.
“I’m not alarmed,” he said, “but there is some concern and it’s rising. The financial stress has intensified over last year.”
As delinquencies rise, he said, there will be other, better prepared farmers to buy those farms.
If money continues to be tight in the coming months and year, then farmers – who tend to be in their 50s, 60s and 70s – may be faced with having to dip into savings to fund their farm.
A lot of older farmers are not going to dip into their retirements.
Scott Van Allen, wheat farmer
“I think it would be a turning point,” said Scott Van Allen, who farms wheat in northern Sumner County. “A lot of older farmers are not going to dip into their retirements.”
For now, a farm crisis remains only a possibility. Many of the conditions are there, but not all: Farmers had many good years to build up financial reserves, they generally have more assets to fall back on than in the ’80s, government support programs remain in place, and interest rates were and still are low.
It’s like seeing scary dark clouds on the horizon. It’s hard to know whether it means tornadoes or just a hard rain.
“If all of the things line up just wrong and you get a perfect storm, then this is a big deal,” said Dan Heinz, an ag banker with Intrust Bank. “But if they don’t, then it’s a soft landing.”
What does farm ground cost?
2015 per-acre cost for south-central Kansas farm land
Source: Kansas State University Research and Extension
How has the cost of farm ground risen?
Price for non-irrigated farm land in Kansas
Price per acre
Inrease from year before
Source: Kansas State University Research and Extension