By Tyler Harris and Frank Holdmeyer
The 2012 Iowa Farm Bureau Economic Summit kicked off Monday with a discussion about monetary policy.
Comparing what defines a "nice machine shed" in today's standards and the 1970s, Jason Henderson, vice president of the Omaha branch of the Federal Reserve Bank of Kansas City, jokes, "Today it's about how many big screen TVs you've got – with a plush leather couch."
Henderson was the first speaker at Monday's Iowa Farm Bureau Economic Summit, pointing out differences and similarities in the agricultural economy today and in various agricultural booms in United States history. The factors driving today's boom are a low U.S. dollar value, a strong export economy, and the value of land, he says.
Another thing Henderson points out is similar to previous agricultural booms is the drop in interest rates on farm land, which it shares with the 1910s, 1940s and 1970s. "They go up because it's cheaper to buy land," he says, noting that regardless, today still differs from the 1940s due to the use of borrowed money. "It was a period of deleveraging."
This cycle has come back in full circle today, according to Henderson, who says it is similar to the state of agriculture in 1979 – the healthiest period before the Farm Crisis. He points out the percentage of farmers today with no debt is even higher than it was in 1979, although the percentage of farmers with an average debt to asset ratio above 70 percent is now higher than the same period.
However, Henderson notes there are significant risks ahead, and several things must occur to bring on a new Farm Crisis – specifically what he calls "Black Swan" events. "These are low probability events that have really bad outcomes," he explains, noting this summer's drought as an example. "The first line of defense against "Black Swan" events is working capital," he says.
Other factors that would have to occur include a 21% decrease in crop revenue and a 16% decrease in the values of farm production, as well as a drop in corn to about $3.49, soybeans to $9, and wheat to about $3.96, according to Henderson.
This is where exports have been beneficial, and Henderson says part of the reason for this is a low supply in China, the leading export market for the U.S. Similar to previous booms mentioned, exports doubled between 2006 and 2011.
At the same time, Henderson notes there are other key players in this equation outside of food production, like the number of ethanol plants shutting down. "It's not only about feeding the world, it's about fueling the world," he says.
With all this, Henderson says if the dollar value rises, exports fall, farmland values drop, and interest rates rise, it would be a sign of an oncoming Farm Crisis. However, like all economists, he can only speculate as to when this might be. "I think the shift will occur when we have inflation," he says. "Inflation is too much money chasing too few goods."
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The biggest concern is not knowing what government is going to do, noted Randy Hertz, Hertz Farm Management. Areas to be concerned about include potential capital gains tax increases, the out of control federal deficit, and environmental policy, he continued. "How can you plan without answers to these questions?"
Watch out for inflation, warned Hertz. "We are out of control, not just with the federal deficit. They are devaluing the dollar and wish they could inflate us out of debt." He said that's also driving interest rates down and "the Fed wants to drop long-term interest rates."
Demographics also enter into land buying decisions, Hertz continued. "Forty-two percent of farmers in Iowa plan to retire in the next five years, but of those 44% have not identified a successor."
Farmers and local investors are still the primary buyers of farmland, said Jim Knuth, Farm Credit Services of America. "Local capital and local competition is driving the market and 50% of the land sales are at auction."
Knuth also noted the number of land sales has been declining the last few years. "With low interest rates, land owners are saying 'what am I going to do with the cash, I better hang on to the land'."
Cash is king, too, according to Knuth. "Buyers have cash in hand," he said. "Buyers are taking small bites and amortizing loans over 16 years." He noted most land sales in recent years have taken place in the fourth quarter.
Current land value increases are not sustainable without hyper-inflation, pointed out Danny Klinefelter, Texas A & M University. "The most likely scenario is that the rate of increase will slow. If land values do fall, it will most likely be the current land buyers who get in trouble. The stress will be on those who are highly leveraged and those who have high levels of non-real estate debt (machinery)."
The economic summit continues Tuesday with a keynote speech by U. S. Secretary of Agriculture Tom Vilsack.