“We think it’s simply inevitable that the row crop guys are going to face some very difficult times and we think it is simply inevitable that land values will be forced to decline and land prices will follow.”
That, says Don Close, one of a phalanx of ag analysts with Rabo AgriFinance, is the short story of the rise and fall of King Corn and the complex that surrounds it. Driven by drought and ethanol demand, corn prices ruled the ag complex for the last eight or nine years. The corn infrastructure rallied, too, with land and equipment, among many things, riding the tailwind of the corn market higher.
That has come to an abrupt and dramatic halt this year with what is expected to be a record corn harvest, assuming farmers can get it out of the field, coupled with a stagnant export market and a mature ethanol market.
And analysts don’t expect corn prices to come back any time soon. “Our expectation is we are very likely are going back to a period of extended below cost of production,” Close says. The result is the beginning of a price plummet in farmland.
Ernie Goss, who holds the Jack A. MacAllister Chair in Regional Economics at Creighton University’s Heider College of Business, conducts a monthly survey of bank executives in a 10-state region to keep a finger on the pulse of the rural economy. The most recent survey showed some concerns.
“The farmland and ranchland price index for September slumped to 33.7, its lowest level since March 2009 and down from 41.4 in August,” he says. An index rating of 50 is growth neutral—anything above 50 is positive growth; below 50 is negative growth.
And it’s not just land values. The September farm equipment sales index slumped to a record low 17.6, he says, and the index has been below growth neutral for 14 months.
While the average farmland price index came in at 33.7, there was a wide range in the 10 states surveyed. Nebraska reported the lowest number at 23.8, followed by Illinois at 31.1, Wyoming at 31.2 and South Dakota at 32.8. On the other end of the scale, North Dakota reported a robust 65.1, Colorado came in at 55.4 and Missouri came in at 54.1. The states in the middle were Kansas at 38.7 and Iowa at 34.1.
According to Close, we can expect land prices to continue to drop, but how much will vary widely. He says Rabo AgriFinance analysts think farmers need to take about 4 million acres out of production for the corn market to find a balance. “If you bought a farm at something in excess of $10,000/acre, you ain’t gonna be one of them,” he says.
I bring this up not to make corn farmers feel any worse than they already do, but to remind cattle producers to be wary of falling into the same trap.
Recreational demand for ranchland has skewed the market upward for many years and that’s not likely to change. But as farmland values continue to plummet, it’s likely we’ll see a similar dynamic in ranchland values.
With record high prices for bred cows and heifers, a drop in other input costs—feed, real estate, you name it—is welcome and essential if cattle producers want to keep their operations above growth neutral.
So keep the cows and heifers at home and expand. The market will reward you for it. But keep recent history in mind. As the sergeant on an old TV cop show used to remind his troops, “Let’s be careful out there.”