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Stable land values and plentiful investors have helped keep ag lenders able to assist farmers.

August 25, 2020

4 Min Read
Signboard with text "For sale" on green lawn
VALUES HOLDING: Strong land values, helped by interest in farmland by investors, are helping the agricultural lending sector stay strong through the challenges of a long downturn in commodity prices and the stress of the COVID-19 pandemic. STSVIRKUN/Getty Images

The agricultural lending sector is strong and healthy, and land values are holding strong despite the lingering downturn in commodity prices and the turmoil in markets, according to Curt Covington, vice president of Ag America. The mortgage origination company offers farmers a way to generate cash and lock in today’s rock bottom interest rates by taking a long-term, fixed rate mortgage on their land.

“Right now, I’d give the current ag econ environment a grade of C+,” he says. “First of all, thanks to the lowest rate environment in my lifetime and a strong demand for ag properties, farmers have been able to keep their leverage position intact. Land values continue very strong because there are certain people around the U.S. that have deep pockets are a willing to pay near top dollar for ag properties.

“Second, many farmers came into the current downturn with really strong balance sheets thanks to the high prices back in 2013 and 2014. A lot of them paid down debt and squirreled away money and even bought land.”

There are two groups other than farmers who also see land as a good investment in tough economic times, Covington says. Those groups are private equity groups and real estate investment trusts. The private equity firms prefer to buy land and so an immediate lease-back to a farmer, he says.

“While the returns are not what they were in 2014, ’14 and ’16, they are still getting reasonable returns and land values are stable,” he says. “And the private equity firms do have an interest in the success of farmers. Their goal is to ensure that there is a vibrant rural America.”

Real estate investment trust investors often come from farm families and they, too, want to see the economy thrive in rural America, he says. That want to own farm property in their retirement portfolio and they often know somebody who can farm it. They are often buyers of smaller parcels of land.

The general ag economy has benefitted for record-low interest rates, which is allowing farmers to borrow working capital by taking out a long-term, fixed-rate mortgage, giving them the cash they need to make it through the tough times while insuring they won’t get caught in the financial trap that cost so many farmers their land back in the 1980s when skyrocketing interest rates left them with rapidly rising debt service bills.

Covington says it has been interesting to watch the impact that the COVID-19 pandemic has had on agriculture.

“The pandemic has caused some sectors to outperform others,” he says. “The greenhouse industry has flourished, for example as people who are staying home more tend to want to decorate their homes with flowers.

“The gardening industry has flourished too. That may be in part because people are worried about food security and want a way to grow their won but also because they are bored and gardening is something they can do for exercise and pleasure while they are stuck at home.”

He says the pandemic has also highlighted issues with the supply chain and that is likely to have long-term effects as the industry tries to cope with lessons learned and apply them to the future.

“Overall, the trend of the large getting larger and the small going away is going to linger, but there is clearly room for the smaller farmer to get creative at supplying consumers things they are increasingly demanding — sustainable, traceable food, whether it is beef or fruit and vegetables. There is a real opportunity in filling those demands,” he says.

For other segments of the industry, such as those highly dependent on the restaurant trade, the pandemic has forced them to come up with new ways to deliver.

“Those that were focused on delivering products to restaurants have really struggled to get their business plan turned around to deliver directly to consumers or perhaps to grocery chains,” he says. “Those that already had a lot of direct access to consumers have been able to do better.”

For those faced with struggles, Covington says, Ag America’s ability to provide a long-term, low-interest mortgage loan offers a potential answer. He says Ag America can work with community and state banks to take over the real estate loans on their books and help them free up more money that can go into operating loans.

Overall, Covington says, he expects farmers to come through today’s challenges and emerge stronger than ever.

“Ag people are the most resilient group of businessmen and women you will find,” he says. “I’m the eternal optimist when it comes to farmers.”

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