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Farmland Price Compounds Challenges of Young Operators

Farmland Price Compounds Challenges of Young Operators
KC Fed examines what it takes to get started in farming right now

Just starting out is hard, harder when the chosen career is farming: it's capital-intensive , labor intensive and uncertain at times. Nathan Kauffman, Kansas City Federal Reserve Economist, says in addition to lower levels of equity and higher debt ratios, farmland prices are now compounding the challenges of farming.

According to the latest report on young and beginning farmers from the Kansas City Federal Reserve, recent trends point to a decline in the share of young farmers who are full owners of the land they operate, mostly due to operations that have gotten larger and advancements in farming, requiring fewer owner-operators.

KC Fed examines what it takes to get started in farming right now

And, new technologies also mean rising production costs, serving as a barrier to farm ownership and triggering ripple effects in agricultural finance, Kauffman says.

"According to the USDA, about 40 hours of labor were required to produce 100 bushels of corn in the 1880s. Less than two hours of labor are needed today," Kauffman explains. "As a result, the average size of farms has grown from 133 acres in 1880 to 420 acres in 2012, and the number of farms has fallen from 4 million to 2.1 million during the same time."

An age shift has accompanied the size trend, also, with older farmers sticking around when times are good. Likewise, more younger farmers enter the profession.

So what does all of this create? Kauffman says often it can translate into ag financiers requiring more collateral for farmland purchases due to younger farmers' greater risk. Therefore, young and beginning famers are opting to rent land instead of an outright purchase.

"Escalating land values raise the fixed costs of agriculture and accentuate the difficulties young and beginning farmers face in building an owner-operator business," Kauffman writes.

And, with less experience typically comes less equity and lower debt-to-asset ratios. Overall, Kauffman says commercial banks are reporting that they are making fewer loans to young and beginning famers, though bankers are also seeing higher loan repayment rates among younger farmers. Though, he notes, this could be a function of more selective lending.

Despite the moving parts, current federal and state policies still support the owner-operator model of U.S. farm enterprises, Kauffman says. However, the future of farming could transition more toward a renter-operator model – especially if market forces continue to drive up the fixed costs of production.

Click here to read the full KC Fed Report, complete with graphs.

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