AuthorThe “FOCUS ON AG” column is sent out weekly via e-mail to all interested parties. The column features timely information on farm management, marketing, farm programs, crop insurance, crop and livestock production, and other timely topics. Selected copies of the “FOCUS ON AG” column are also available on “The FARMER” magazine web site at: https://www.farmprogress.com/focus-ag Archives
March 2024
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Farmland Values Reach All-Time Highs3/6/2024 Farmland values in the Upper Midwest continued to move higher in 2023, surpassing the highest levels ever in many areas. The very high net farm income levels in 2021 and 2022 provided many farm operators with some extra cash resources to invest in farmland purchases in 2023. The enhanced farm income levels, together with a somewhat limited amount of land offered for sale in many areas, resulted in continued higher land values in many portions of Iowa, Minnesota and other areas of the Upper Midwest during 2023. Many areas of the Upper Midwest were somewhat dry in 2023 and experienced average to slightly-below average corn and soybean yields in 2023; however, there were some areas that benefitted from timely rainfall to achieve above average yields. Crop prices were solid early in 2023 and then declined later in 2023. These factors and the much higher real estate interest rates in 2023 did not seem to have a major impact on the land values for the year.
Iowa State University does a comprehensive land value survey each December, which is regarded as one of the best resources on trends in Midwest farmland sales. The Iowa State Land Value Survey is based on actual land sales in Iowa over a 12-month period, as well as from reports by agricultural professionals that are knowledgeable regarding land market conditions, including appraisers, farm managers, and ag lenders. The complete 2023 Iowa State Land Survey results can be found at: https://www.extension.iastate.edu/agdm/ The average value of Iowa farmland in 2023 was of $11,835 per acre, surpassing the 2022 average of $11,411 per acre, which previously was the highest average land price ever recorded since the Iowa State survey was initiated in 1941. Since the recent low point of $7,183 per acre in 2016, the Iowa Land Value Survey has shown an increase of 65 percent, or $4,652 per acre, in the past seven years (2016-2023). This includes a 57 percent increase in land values in a span of three years from December of 2020 until December of 2023. Based on USDA land value data, land values in the Upper Midwest have shown large increases in the past three years (2020-2023). The highest 3-year percentage increases were Kansas at 65 percent, Nebraska at 57 percent, and South Dakota at 50 percent. Other reported increases in land values from 2020 to 2023 were Minnesota at 42 percent, Iowa and Wisconsin at 41 percent, North Dakota at 37 percent, Indiana at 35 percent, and Illinois at 31 percent. Many of these States have been hard-hit by drought at some point during the past three years; however, that has not seemed to slow the trend toward much higher land values. The average land values in 2023 increased in eight of the nine Iowa crop reporting districts as compared to 2022 average values, with only the Northwest district showing a slight decline. The Southeast district in Iowa recorded the greatest year-over-year increase in in land values in in 2023 at a 12.8 percent increase, followed by the South Central district with an increase of 9.8 percent. All of the other Iowa districts, except East Central district, reported land value increases between 2.6 and 3.7 percent in 2023. The Northwest district reported the highest 2023 average land value in Iowa at $14,753 per acre, with the North Central, Northeast, West Central, East Central, and Central districts all averaging over $12,000 per acre. Trends in farmland values in Southern Minnesota have been tracking very closely to the trends shown in the Iowa land value survey for northern crop reporting districts in Iowa. Similar to many areas of Iowa, land values were much higher in 2023 in most portions of Southern Minnesota due to the strong farm income levels in recent years for many farm operators. There have been numerous land sales across Southern Minnesota that have topped $12,000 per acre in the past 12 months, with some isolated sales over $15,000 per acre. Even with the higher land values, there has continued to be a gap between the prices that are being paid for high quality, well-drained land, as compared to lower quality land that is poorly drained. Based on the recent Iowa State Survey, active farmers accounted for approximately 70 percent of the farmland purchases in Iowa in 2023, which was primarily existing farm operators that were expanding their land base. About 24 percent of farmland was purchased by real estate investors, with about half being retired farmers and other local investors and the other half being non-local investors. The remaining 6 percent was sold for other purposes. The main reasons listed for the strength in farmland values was continued strong farm income levels in 2023, the limited supply of land offered for sale, and strong local demand for land in 2023. There has continued to be strong interest for purchasing land among farmers in many areas as we enter 2024. The U.S. Federal Reserve increased the prime interest rate by 5.25 percent in an eighteen-month period, increasing the prime rate from 3.25 percent in early 2022 to 8.50 percent in mid-Summer of 2023, which remains the current prime rate. The Federal Reserve continues to discuss the likelihood of possible modest decreases in the prime interest rate during the balance of 2024; however, that is not certain at this point. Prior to 2022, the prime rate interest rate had not changed in nearly three years which provided a stable financing environment for farmland. Following is an example to show the impact of the rapid rise in long-term interest rates …… Assume that a land buyer purchased a 160-acre parcel of farmland and financed $6,000 per acre ($960,000 total) with a 25-year amortized real estate mortgage (REM). Following are the estimated annual principal and interest (P & I) payments at various prime rates, as the long-term interest rates have increased:
As part of the 2023 Iowa State Land Value Survey, respondents were asked their opinion regarding the future direction of farmland values during the next five years. Forty eight percent of the respondents expect Iowa farmland values to decrease by the end of 2024 as compared to 2023, with most expecting a decrease of 5 percent or less. Twenty-two percent expect farmland values to remain fairly steady in the next 12 months, while 30 percent forecast an increase in Iowa land values the end of 2024. When asked about farmland trends over the next five years, 70 percent of the respondents expect land values to increase, with most expecting an increase of 10-20 percent, while 30 percent feel that future land values will remain steady or decline in the next few years. Currently, most signs point toward stability and possibly some modest decreases in land values in the next 12 months. There are some lingering “caution flags” that could put potentially put even more downward pressure on land values. These potential challenges include:
As we enter a period of lower commodity prices and tighter margins in crop and livestock production, farm operators need to be more cautious on over-extending their farm business to purchase land. This is especially the case for beginning farmers and those borrowing a significant amount of money that will be impacted by the higher long-term interest rates. It is best to sit down with a good farm business financial advisor or ag lender to analyze the potential financial impacts on the farm business before finalizing the farm purchase decision.
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Arriving at equitable land rental rates been has always been a challenge for farm operators and landlords alike and will likely continue to be difficult for the 2024 growing season. Many times, land rental rates for a coming crop year are based on the profitability in crop production in the previous year or two before. In some cases, this can present profitability challenges for farm operators, if grain prices drop or if there are yield challenges. On the other hand, there can be extra profit for farm operators in years with above average yields and higher levels of crop prices. Many landlords gradually increased cash rental rates in many areas of the Midwest from 2020 to 2023, in response to improved crop production profit levels. As we head into 2024, crop prices have declined significantly with much tighter projected profit margins for corn and soybean production.
An alternative to flat cash rental rates that may be difficult to “cash flow” would be for producers and landlords to consider using a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop prices and/or yields vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation, and how the flexible lease is set up. A “true” flexible cash lease allows for the landlord to receive additional land rental payments above a “base” land rental rate, if the actual crop yields and/or market prices, or the gross revenue per acre, exceed established “base” figures. It would also allow for the “base” rent to be adjusted downward, if the actual crop yields and prices per acre, fall below the established “base” figures. Most flexible leases have been modified in recent years into a “bonus rent” agreement. This type of flexible lease uses a reasonable “base rental rate” that can “flex” upward with an added rental payment to the landlord, if the “base” crop yield and/or base crop prices, or the base crop revenue per acre, are exceeded; however, the final rental rate does not drop below the base rental rate. There are many variations to setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, a base crop revenue compared to a harvest crop revenue, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Flexible leases can work well for newer or younger farm operators that may not be able to afford the higher cash rental rates for farmland. A flexible lease makes it easier for producers to utilize risk management tools such as crop revenue insurance policies and forward pricing of grain. A flexible lease, with a fair base rental rate, allows landlords the security of a solid base rental rate, while having the opportunity to share in added profits when crop prices and/or yields exceed expectations. Flexible leases provide an alternative for landlords that want to continue to work with long-standing farm operators, without setting cash rental rates too high to keep the current tenants. Utilizing “flexible cash lease agreements” between farm operators and landlords can be a good management strategy as an alternative to extremely high straight cash rental rates; however, these agreements need to be fair and equitable to all parties. Landlords also need to be willing to adjust the “base” cash rental rates lower as necessary, if crop margins become quite tight, such as occurred from 2015-2019 and could possibly occur again in the coming years. It is extremely important that all aspects of a flexible land rental lease agreement be detailed in a written rental contract that is signed by all parties. The agreement should include the base rent, yield and price determination, as well as other provisions of a flex lease. Successful “flexible cash lease agreements”, just as any other long-term cash rental agreement, have always involved cooperation, trust, and good communication between the farm operator and the landlord. “Base Rent” Determination One of the biggest challenges with flexible cash rental leases is determining the “base rent” per acre, which in most instances is the minimum rental rate for the year on a land parcel. The “base rate” should be adjusted upward or downward annually, depending on changes in crop price expectations, average crop yields, or the projected “break-evens” for crop production for the coming year. The best way to establish the “base” rental rate is to have a rental rate per acre that is agreeable to both the landlord and farm operator, with an established method of calculation. There are several ways to approach the determination of a “base rental rate”, including utilizing average land rental rates for a given area from land grant universities or the USDA National Ag Statistics Service (NASS). Several universities and NASS publish annual updates on land rental rates in many areas. A good flexible lease will detail method and calculations that will be used to determine any potential added (bonus) flexible rental payments. In addition to a base (minimum) rental rate, many flexible leases also contain a “maximum” cash rent per acre. Typically, maximum annual rental rates in a flexible lease arrangement are set an established rate above the base rental rate (ex- $50 to $100 per acre)a. In most cases, any added or bonus rental payments are paid with the final rental payment for the year. Determining Yields, Prices, and Revenues for Flexible Leases Many flexible cash leases require a “base yield” of some type. The easiest method to get a base yield is to use the crop insurance APH yield on a given land parcel, which is updated annually. Actual yield calculation on the farm for a given year can be also be determined by the verified crop insurance yield for the year, or by warehouse receipts, settlement sheets, scale tickets, bin measurements, grain cart weigh wagons, yield monitors, or any other method that is acceptable to both the landlord and farm operator. Many times, yield determination requires a certain degree of “trust level” between the landlord and the farm operator. The crop “base price” for a flexible lease could be the projected harvest (October) price at the local grain elevator or processing plant for that crop on a specified date prior to planting (ex.– March 1 or April 1) for corn and soybeans. The final price that crop would be the price at the same local location on a specified date in the Fall (ex.- October 15 or November 1). In some cases, weekly or monthly average price at the local level from planting to harvest is used to determine the final price. Another alternative is to use the Spring crop insurance price (finalized on March 1) as the base price and the Fall harvest crop insurance price (finalized on Nov. 1) as the final price to determine flexible rental rates. Whatever method is used to determine the “base” and final prices, it should be consistent, using either crop insurance or the same grain elevator or processing plant as a source. Resources for Land Rental Agreements and Flexible Leases There are many variations when setting up a flexible lease agreement between a landlord and farm operator, including using yield only, price only, revenue based, and many more. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement and the calculations that are used to determine the final rental rate. It is also very important that flexible lease agreements, as well as all land rental contracts, be finalized with a written agreement. Iowa State University has some very good resources on flexible cash leases, including sample cash rental contracts, which are available on their “Ag Decision Maker” web site, which is located at: http://www.extension.iastate.edu/agdm/.
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Commodity Credit Corporation (CCC) commodity loans on harvested corn, soybeans and wheat were regularly used by farm operators in the 1990’s and early 2000’s as a grain marketing tool. The use of CCC commodity loans dropped off considerably from 2008-2014 and again from 2020-2022, when grain prices reached their highest levels in many years. As farmers finish up the 2023 harvest season, the use of marketing assistance loans (MAL’s), which are the same as CCC commodity loans, has again taken on more significance as an option in setting up post-harvest grain marketing plans for corn and soybeans.
The CCC commodity loans (MAL’s) are originated through county Farm Service Agency (FSA) offices after the grain has been harvested. The MAL’s are 9-month loans from the time the loan is established. A CCC commodity loan can be established both on farm stored grain and on grain in commercial storage with a warehouse receipt. Producers receive the value of the loan at the time the CCC loan is established. The loan can be repaid at any time during the 9-month loan period, by repaying the amount of the loan principal plus the accrued interest. The 2018 Farm Bill established national loan rates for the various commodities that are eligible for the marketing assistance loans. Following are the 2023 national loan rates for common crops in the Upper Midwest: · Corn --------- $2.20 per bushel · Soybeans --- $6.20 per bushel · Wheat ------- $3.38 per bushel · Barley ------- $2.50 per bushel · Oats --------- $2.00 per bushel · Grain Sorghum --- $2.20 per bushel The county loan rates are then adjusted higher or lower than national rates, based on local commodity price differentials compared to national price levels. Following is the range of county corn and soybean loan rates for MAL’s in the Upper Midwest States: · Minnesota -------- Corn = $2.02 to $2.13/bu.; Soybeans = $5.82 to $6.15/bu. · Iowa --------------- Corn = $2.07 to $2.30/bu.; Soybeans = $6.07 to $6.32/bu. · Nebraska ---------- Corn = $2.05 to $2.27/bu.; Soybeans = $5.82 to $6.18/bu. · South Dakota ----- Corn = $2.04 to $2.21/bu.; Soybeans = $5.67 to $6.10/bu. · North Dakota ----- Corn = $1.99 to $2.20/bu.; Soybeans = $5.67 to $5.97/bu. · Wisconsin --------- Corn = $2.03 to $2.20/bu.; Soybeans = $6.10 to $6.29/bu. The MAL loan interest rate is adjusted monthly and is set up at one percent above the CCC borrowing rate from the U.S. Treasury. The interest rate on MAL loans is fixed for the entire term of the 9-month MAL, except for a potential CCC interest rate adjustment on January 1. The current interest rate on marketing assistance loans (as of 11-01-23) was 6.50 percent, which compares to an interest rate of 8 to 9 percent for short-term financing at many commercial ag lending institutions. Producers only pay interest for the time that the MAL is in place. (Example --- $200,000 MAL corn loan at 6.50% interest for 180 days …… ($200,000 x .0675) / 365 x 180 = $6,411 interest payment for 6 months). Farm operators have the flexibility to place grain under a MAL at a local FSA office any time after the grain has been harvested. Producers also have the flexibility to treat the commodity loan as either “income” or as a “loan” when the loan proceeds are received. This can have income tax implications, depending on how and when the loan proceeds are received. It is best to consult with a tax consultant before determining the timing and the preferred method of receiving the loan proceeds. If commodity prices drop to levels that are lower than county loan rates, eligible producers would potentially be eligible to release the grain that is under a marketing assistance loan at a rate that is lower than the county loan rate. FSA issues a “posted county price” (PCP) for commodities that are eligible for MAL’s, which are updated and posted daily at local FSA offices, or available on county FSA websites. If the PCP is lower than the county loan rate, the producer could realize a “marketing loan gain” (MLG), if the grain is released at that lower PCP. (Example --- a producer places corn under a MAL at $2.10 per bushel, a few months later the PCP is $1.90 per bushel, resulting in the potential of a marketing loan gain of $.20 per bushel on the day the corn loan is released.) If the PCP drops below the county MAL loan rate, producers also have the option to collect a loan deficiency payment (LDP) on a commodity, in lieu of putting the grain under a commodity loan. The LDP calculation is similar to the calculation for marketing loan gains. Grain that is already under a commodity loan is not eligible for a LDP, and a LDP can only be utilized once on the same bushels of grain. There has not been significant LDP eligibility for corn and soybeans since the early 2000’s and we do not anticipate any LDP opportunities for the 2023 corn and soybean crop that is being placed in storage. Producers must be eligible for USDA farm program benefits and must have submitted an acreage report at the FSA office for 2023 to be eligible for marketing assistance loans on this year’s crop production. Producers must maintain “beneficial interest” in the grain while it is under a MAL. Beneficial interest means that the producer maintains control and title of the commodity while it is under a commodity loan. Producers should contact their local FSA office to release any grain that is under a marketing assistance loan before it is delivered to market (“call before you haul”). Following are some reasons that farm operators may want to consider utilizing marketing assistance loans (MAL’s) as part of their grain marketing strategies: · Provides short-term credit at relatively low and stable interest rates. · Loan funds can be used to pay post-harvest expenses and land rental payments for the current year or for prepaid crop inputs (seed, fertilizer, etc.) for the following crop year. · Loan funds can also provide the necessary funds to make year-end or January principal and interest payments on term loans and real estate loans. · Allows a producer to receive partial compensation for corn and soybeans during or following the Fall harvest season, when commodity prices are traditionally lower than average. · Allows a producer the flexibility to market the grain in future months after the grain has been placed under a MAL, including forward pricing the grain for future delivery (remember that the commodity loan must be satisfied at the FSA office before the grain is delivered.) · Commodity loans can also be used by livestock producers that plan to feed the corn or other grain, which is followed by just releasing the grain that is under loan as it is fed to livestock. · If commodity prices decline below the county CCC loan rates, the grain that is under loan can be released at the lower price, or producers can collect a loan deficiency payment (LDP). For further information on USDA marketing assistance loans (MAL’s) and county loan rates for various commodities, farm operators should contact their local FSA office, or go to the following website: https://www.fsa.usda.gov/programs-and-services/price-support/Index Note - For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN. (Phone - (507) 381-7960) E-mail - kent.thiesse@minnstarbank.com) Web Site - http://www.minnstarbank.com/ |