Dealers looking for indicators of when the current boom in farm equipment sales may be softening should look at any signs that the value of farmland may be weakening.
In terms of both accumulated cash and high levels of asset values, the current wealth of U.S. farmers may be unprecedented. This is showing up, not only in their high levels of purchasing capital equipment, but also in their acquisition of farmland.
This is where Mike Boehlje, distinguished professor in the Dept. of Agricultural Economics and the Center for Food and Agricultural Business at Purdue Univ., sees a significant correction could be in the offing.
“If we continue to bid land values up at the level we’ve done recently and it continues for another year or two, we have to have a correction,” says Boehlje. “If we continue bidding land values up at the pace we have, and if interest rates should go up and commodity prices go down as they have recently, land values will have to adjust.”
He says the industry is moving itself into some unsupportable space relative to land values, particularly in light of recent sales where farmland has sold above $10,000 an acre. “These numbers are very difficult to support when you have more conservative expectations than current market prices of both commodities as well as interest rates,” he says.
Even those paying cash for high value farmland will be hurt if the worst-case scenario should develop, according to the Purdue professor.
“Paying cash would certainly reduce their financial stress in terms of having to make payments, but it doesn’t change what happens to the value of the asset,” he says. “If farmers’ incomes fall and higher interest rates prevail, the market values of those assets decline. So it means that the farmer may suffer a wealth loss. While wealth losses aren’t as painful as cash losses — from the individual farmer’s perspective he doesn’t have a cash flow debt servicing problem — but his wealth deteriorates.”
Boehlje adds that we won’t see financially stressed properties being forced on the market like the situation with farmland in the 1980s in agriculture, or more recently in the housing market.
This, he says, is the good news. “This is one of the reasons why there is a possibility of having more of a soft landing than you might have otherwise because we won’t have the kind of contaminate effect of highly leveraged properties being forced on the market during a period of time when the market doesn’t have much eagerness to absorb those properties.
“So it is partly good news, but it doesn’t protect an individual farmer from the prospects that he might have paid too much for that piece of farmland compared to what it’s worth in the longer run,” say Boehlje.
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