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Banker Advice On Land Values, Risk Management, Interest Rates

Article-Banker Advice On Land Values, Risk Management, Interest Rates

img_2345.JPG Where are land values going in the future, and why have land values increased so much? Those are literally the million-dollar questions as ranchers consider investing in additional farm and pasture ground. In 2010, 72% of land in the U.S. was bought by existing farmers, with 23% of purchases made by investors, and only 4% bought by new or beginning farmers. I chatted with Nate Franzen, ag lender at First Dakota National Bank in Mitchell, SD, about land values, risk management, interest rates, succession planning and feeding the world.

“The land values we have now need to be sustainable for farmers to be able to continue to raise food at prices that consumers can afford. It’s important for us to think globally about population trends and the growing middle class around the world and act locally in our farming practices. Commodity prices, cost of inputs, interest rates, investment alternatives, production efficiencies and major reductions in the safety net of the farm bill are all factors that influence land values in the U.S. It took 18 years to correct the land crash in the 1980s. We don’t think this crash will happen again because we aren’t in a credit bubble. However, we might certainly be in an asset bubble,” says Franzen.

Franzen explains that land is a finite resource, and with a growing population around the world, efficiency will be king.

“There is only so much productive land on this planet. Brazil, Russia, India and China (BRIC) are rapidly growing countries with a developing middle class. China and India currently have 400 million people in the middle class, which is projected to grow to 1.2 billion by 2020. With a worldwide population growing from 6 billion to 10 billion people, that’s quite an increase in people who need to eat. We are in such a dynamic market right now that things can change very quickly,” he says. “Our producers have had such tremendous opportunities to be profitable. What has kept me up at night is the complacency of some ranchers who are enjoying these profits now and not setting aside funds to prepare for the tough times ahead. As soon as we see other countries not comfortable in investing in us, we will see interest rates skyrocket,” says Franzen.

Franzen adds that increased interest rates, however, might be an indication of good times to come.

“Everyone in agriculture better hope interest rates go up to 8%. And, I know those of you paying 4% interest right on your operating loan now think I’m crazy, but increased rates mean we are seeing a healthier economy. Do you have your own board of directors on your operation? An advisory board on your ranch will help to guide the operation, transfer assets, share knowledge and reduce risk. What worries me is the rancher who waits to retire until he is well in his 70s and has a hard time letting go. This type is usually the one who doesn’t have a succession plan, and the operation is lost because of poor planning,” he explains.

Solid advice for an aging population of ranchers, but what about the young people?

“The biggest challenge for young people is that it takes so much investment. There are great tools for young people to take advantage of to get started. It takes a lot of money to get in, and it takes a lot of work. Succession planning is so important, and if a young person is taking over an operation, that individual should be able to take ownership gradually over time.”

Whether young or old, the challenges of production agriculture are numerous. By managing risk, having a plan, setting aside dollars in preparation for lean times, working hard, acting locally and thinking globally, producers can find success in today’s food production industry.

What do you think of Franzen's advice? If you're an established farmer, what advice would you give young people about getting started in the business? If you're a new farmer or rancher, what kind of help or programs would help you get up and running?