Through the Windshield: Part II
The big farm trend started decades ago. The question is, “will this continue?”
This is the second installment of a three-part opinion series by Ben Voss and Ron Lyseng, exploring firsthand insights from a 14-day drive through rural America.
I saw a lot of new yards on my tour, with huge grain bins, large fleets of newer equipment and nice, new big sheds to store it in. Those are the big farms ready to get bigger.
I also saw many small and medium sized farms who likely took on debt and bought new(er) equipment, houses and shops. Many of these smaller yet ambitious farmers supplement their farms with off-farm income. This takes a huge toll on families. Eventually the money offered for land is too enticing to refuse. Private land investors are continuing to invest in farmland knowing there are big farmers and willing renters at premium rates. Wealthy urban citizens are interested in buying land for recreational purposes and investment. This has meant it’s not hard to sell land today.
At the recent Farm Con event I attended in Kansas City, many of the expert speakers on stage confirmed what I was observing. Here are some stark facts to consider for US farmland:
Approximately 44,000 farms in the US are responsible for 75 per cent of the production of all farm products. That means 4.4% of farms dominate.
Approximately 5,000 farms per month are selling or shutting down
Of the approximately 1,000,000 viable farms in America, most are small
Farmland values are being inflated by off-farm investors seeking the safety and security of land as a solid asset
Cap rates are below one per cent for investment returns on farmland
Not all, but a good portion of the recent farmland in Iowa continues to sell for over $20,000 per acre. A 250bu/ac corn crop at $3.75/bu will only deliver a marginal gross profit of $40-$50/acre. Less efficient farms lose money at this price, as noted in the recent Farm Bill payouts. If they are making some margin, farmers can utilize that gross profit for things like machinery purchases, technology investments, grain storage or just repayment of debt. If they did put it towards land, it would take 500 years to pay for this land on the profits from corn at today’s prices. Renting out the land at $250/acre is more profitable than trying to make a gross profit from the grain when you really look at it with honest eyes. They are buying land because they expect it to appreciate, and they can sell it in the future to recover the investment and a maybe some capital appreciation. However, the appreciation of land today is largely driven by non-farm investors not the cap rate or ROI. Higher rents are driven by the competition of larger farms looking to expand and increase their efficiency.
Many smaller farms are using land equity to finance their losses. They did not earn that equity from past years farming profits. It was all land appreciation or artificial earnings. A major US farmland lender that I recently listened to reinforce this fact. It is not smart to consume your equity to fund farming losses, but that doesn’t mean people won’t do it. The low grain price is going to last longer than people hope. It’s going to be hard on folks that are using up their land-appreciation equity to survive. I have a lot of empathy, but the reality is this is likely to push more farm consolidation.
Another observation I had from my travels was that ag-industry investment decisions are on hold. This was reinforced with the views shared at Farm Con. No matter what segment of the agri-business industry you are in, strategies are being re-worked. Business plans are challenged with new assumptions. Very few people thought Robert F. Kennedy, Jr. would be the U.S. Health and Human Services Secretary. A very disruptive change-agent is now in charge of the American food and health system. He openly talks about the status quo and is empowered to change it. It’s just best to wait right now until we know what the stable direction is going to be.
A key theme I hear everywhere, and this was also reinforced at Farm Con, is that nowhere in the world is there some untapped labor pool that is ready to work on farms. Even Mexican or Indian farmers are complaining about shortages of field labor. Farm labor has been shrinking for hundreds of years, and it is just going to get worse. That means the only way to farm is with technology, more scale and more efficiency. Farms are simply going to get bigger because that is the only way to farm all the land with less workers. In a future article, I will dig into the impact this will have on the machinery industry.
Corn and soy growers wonder what the heck will happen. There are many threats and very few opportunities. So, what does this mean? It means we are heading for a major disruptive event. It means that change is coming. The issue I saw was that no one can agree on what the change will be? Who will be asked to make the sacrifices? All I see is that no segment wants to be the one. The U.S. President will make the decision for everyone if we can’t come to a consensus, including Canadians, and sacrifices will be enforced when those decisions kick in.
On the bright side, disruptive events are really great opportunities for those who are positioned to be the leaders through the change. I suggest we all start exploring what those opportunities might be and be ready to pivot. It is not all doom and gloom.
Ben Voss is a seasoned executive, board director, and engineer with over 20 years of leadership in agriculture, manufacturing, and technology. He also runs a fourth-generation grain and forage farm in Saskatchewan, bringing hands-on farming experience to his strategic business expertise.
Ron Lyseng spent 25 years as a Technology Analyst at The Western Producer, covering cutting-edge innovations in agriculture. Now retired in Birds Hill, Man., he is working on several books and is available for freelance work.