Category: Farm Management

In August 2023, the USDA National Agricultural Statistics Service published their annual report of state-level land values for farm real estate, which includes both cropland and pasture values. The results of the report indicate a strong market in the Southeast, with Georgia leading the region at a 9.8% increase in 2023 farmland values over 2022. The overall increase for the United States was 7.4%, and Kansas led the nation with a 16.3% increase in farm real estate values from 2022.

Over the last three years, farmland values have increased by record amounts, according to the USDA-NASS survey data. At the same time, the financial position of many farmers has been affected by higher input costs and increasing interest rates. Why don’t we see a one-for-one decrease in land values when interest rates increase and farm profitability moderates? Well, the most straightforward answer is that farmers are a mixed group, and their individual financial positions aren’t necessarily the same as their neighbor’s. This makes it hard to predict the movement of the land markets during times of transition.

When I read about the farmland market in articles from across the country, I am always struck by the variety of factors at play. First, crop yields are going to drive willingness to bid. Several years of good yields and prices will motivate both farmers and non-farm investors to participate in the land market. But there are always other factors including proximity to urban development or water availability/rights. It is important to remember that farmers are the majority owners of farmland, and their motivations to buy and sell land are big drivers in the market. This means when that rare piece of good farmland near your operation comes up for sale, you will likely be in the market regardless of where interest rates are today. You may also be looking to expand your operation and bring on another generation. When that is the case, buying land becomes a priority for your farm business, and your willingness to bid in a strong market is going to be robust. Each of these factors will contribute to support for the local land market that may keep these recent increases in interest rates and moderation of farm incomes from having a big impact on land values in your area. 

Taylor, Mykel R. “2023 Land Values and Buyer Motivations.” Southern Ag Today 3(37.3). September 13, 2023. Permalink

The year 2023 marks another unique year in terms of prolonged high inflation and high interest rates. The series of interest rate hikes raised concerns, especially when Silicon Valley Bank went defunct earlier this year, and other regional banks experienced liquidity problems. With these inflation rates and interest rate hikes affecting the broad economy, how does the agricultural lending condition look?

The most recent survey of commercial banks from the Kansas City Fed shows that the average agricultural operating loan interest rate exceeded 8 percent from the first quarter of 2023, and the farmland loan interest rate also nearly reached 8 percent. Loans issued from commercial banks closely follow the movement of the effective federal funds rate. As the federal funds rate increase slowed in the last two quarters, the increase in agricultural loan interest rates also slowed down. 

Loan interest rates from the Farm Service Agency (FSA) showed a unique pattern in the last few months. Throughout 2022, loan interest rates from the FSA increased with the increase in the federal funds rate.  However, FSA started to lower interest rates from the first quarter of 2023. In fact, as of August 2023, the FSA loan interest rates – both the operating loans and farmland loans – are lower than the federal funds rate. This rare occurrence is expected to go away eventually, but the FSA is indeed providing very favorable rates as of today.Of course, if the higher interest rates result in increased borrower default or general economic decline, the Fed will slow down the interest rate hikes. Currently, delinquency rates on commercial bank loans still remain at a historical low. Similar findings are shown for agricultural loan default rates. While there has been a slight uptick in default loans in the Farm Credit System, the default rate is still lower than the five- or ten-year average. Default rates from commercial banks also remain at a relatively low level.

It is expected that these interest rates will still increase in the second half of 2023. With the Fed aiming for a 2 percent inflation rate, the effective federal funds rate is expected to reach 5.4 percent to 5.6 percent. This will again have an impact on agricultural loan interest rates in the foreseeable future. High interest rates, combined with lower farm income forecasts in 2023 and 2024, will be the adverse factor for stagnant farmland value in 2023 and 2024.

Sometimes, in Extension, a farmer will ask what kind of recordkeeping system is required for the farm. It is an interesting question and one that can have several layers. If we think of all the records that a farm might be required to have, it can be a lot. Records for the farm include production, food safety, labor, marketing, sales, expenses, and other business documents. All these records are important for different reasons. Typically, a farm owner will need these to analyze, verify, and produce documentation of activities occurring (or not occurring) in their operation. Sometimes, it is solely for the farmer, and other times, it may be required by a regulatory agency. Either way, having systems in place to accurately and efficiently organize this information is important. 

For this article, we are focused on financial records for the operation. This encompasses sales records, expenses, and other business transactions (like loan payments). The first goal should be to capture everything. Only recording half the expenses, for instance, would produce a bad set of data for the farmer. One step in the right direction is ensuring a business bank account is set up for the farm. Assuming there is not a mix of personal and business transactions, this will capture how much money is coming in and out of the business. 

A business bank account will not include everything, however. Assume, for instance, a piece of machinery was bought but did not require a down payment or loan payments for the first six months. In this instance, something significant occurred, and only looking at the money going in or out would not tell the whole story. It is important to have an organized filing system, either electronic or hardcopy, where source documents are retained, secured, and backed-up appropriately. Once all activities are accounted for, other processes can be implemented to organize and categorize the information.  

The most straightforward method of organization is recording everything by date. An example is a folder that records everything in January 2023, February 2023, and so on. Knowing an activity occurred during April, for instance, you could locate it in that folder. While this is serviceable, having additional categorization, like whether it is an expense and what the particular expense is related to – inputs, labor, overhead, etc. provides granularity for finding specific records. For finances, recording transactions in an accounting system where they are put into a ledger provides even greater organization and an ongoing tally of everything that has occurred during the year. This ledger can be used to determine profitability, analyze the business, file taxes, and make other necessary reports from the business. The source documents should always be available for backup, but having one file that encompasses everything provides a much more workable format.

Primarily we’ve discussed financial records of the business. However, it is important the farm owner knows all of the regulations and record requirements of their business. Ultimately, the best system is the one you understand and will actually use.  Over time, it can become more refined to meet the needs of the business. It is a balance between how much detail and organization is needed and how much time and resources a business has to develop systems to put in place. A more complex filing system would be more difficult to set up but will likely pay dividends in the long run. And as with any large undertaking, you must start “one bite/file at a time.”

Since March 2022, The Federal Open Market Committee (FOMC) has enacted eleven interest rate hikes accounting for a 525-basis point (5.25%) increase (FRED, 2023). We discuss how increasing this rate impacts agricultural lending in 2023.

The Fed Funds rate indirectly impacts the cost of other market interest rates such as those for agricultural operating loans. The FOMC influences rates by managing available cash (money supply) in the financial sector. In terms of supply and demand, if cash is limited then the cost to borrow available cash (interest) increases, and borrowing is deterred. The Fed utilizes these tools, in either direction, to slow down the economy in times of rising inflation or to reinvigorate economic activity in recessionary times. 

According to the Kansas City Fed (2023), operating loan rates are typically higher than the effective federal funds rate. A survey of lending terms to farmers for the tenth financial district showed that, on average, a producer is paying an 8.03% interest rate compared to 3.66% the previous year. Agricultural lending has become increasingly expensive, creating additional financial stress in the agricultural sector. Table 1 is derived from budgets across the southern region. Included are estimates of primary pre-harvest expenses that might be included on an operating loan. 

Table 1. Southern Region, Select Pre-Harvest Production Costs

Cost Category	Corn ($/Acre)	Cotton ($/Acre)	Rice ($/Acre)	Peanuts ($/Acre)
Seed	$104.00	$118.00	$44.00	$97.00
Fertilizer	$303.00	$192.00	$178.00	$64.00
Pesticides	$88.00	$197.00	$151.00	$77.00
Fuel (Irrigation & Equipment)	$25.00	$37.00	$23.00	$68.00
Q2 2023 Interest (8.03%)	$41.76	$43.68	$31.80	$24.57
Q2 2022 Interest (3.66%)	$19.03	$19.91	$14.49	$11.20

Interest costs for Q2 2022 and 2023 (see Table 1) represent the cost of borrowing the capital needed to cover the listed production expenses at either 2022 or 2023 rates. Interest is estimated by totaling the select per acre production costs and multiplying it by the prevailing interest rate ($520*0.0803 = $41.76). It’s worth noting that these expenses are only a subset of production costs.  The impact on interest expenses will increase as individual operating loans include other costs of production. Additionally, higher interest rates are putting considerable pressure on the financing cost of equipment and land ownership.

Producers are now faced with paying over double the cost per acre in interest for 2023 than if they were to take out the exact same loan in 2022.  Keep an eye on decisions out of the September FOMC meeting as it may hint to the Fed’s future choices to raise rates through 2023. If inflation continues to decrease and underlying economic activity slows, the need for further interest rate hikes may diminish.    

References

Board of Governors of the Federal Reserve System. (2023, July 27). Open Market Operations. Retrieved July 27, 2023, from https://www.federalreserve.gov/monetarypolicy/openmarket.htm.

Federal Reserve Bank of Kansas City, (2023, July 19). Ag Credit Survey. Retrieved July 19, 2023, from https://www.kansascityfed.org/agriculture/ag-credit-survey/.  

Loy, Ryan. “The Federal Funds Rate Impact on Agricultural Lending.” Southern Ag Today 3(34.3). August 23, 2023. Permalink

Determining the appropriate bid price for beef cows is important for buyers and sellers in the ranching industry. The Bid Price for Beef Cows decision aid is a practical and valuable tool that simplifies the bid price calculation and enables insightful “what if” analysis based on your financial expectations and productivity projections. This tool employs a net present value (NPV) approach, factoring in the desired return or discount rate.

Several variables play a significant role in determining the bid price for a cow, including: the total debt of your operation, operating costs per cow, estimated future calf prices, cull cow prices, required loan amount, interest rate, number of calves per cow, weaning weight, weaning rate, and more. In this example, we focused on the effect of higher interest rates in the bid process.

The amount of debt required for cow purchases and the interest rates directly affect the bid price. The higher the debt and interest rates, the lower the amount a buyer can afford to pay. For instance, an interest rate of 11% will reduce the bid price by $367 per head (Graph 1) compared to the 6% interest rate we may have seen a couple of years ago.

Figure 1: Beef Cow Bid Prices vs Interest Rates

In conjunction with operating costs, future calf prices are crucial in determining the bid price. Calf prices have increased in recent years as well as operating expenses. For the example bid prices in Fig.1, we assume an initial increase in calf prices for the next three years, followed by a slight decline. We expect prices to decline when the US cow inventory grows and US beef production increases. We also included a variable discount rate that rose to 7% with higher interest rate scenarios.

Using the Bid Price for Beef Cows tool will allow ranchers to analyze different scenarios and understand how much they should pay to restock their operations. Find the tool here (https://agecoext.tamu.edu/resources/decisionaids/beef/ ) and give it a try.  Estimating reasonable future prices for your cattle and operating costs is imperative to better assess how much you can afford to pay for a replacement cow. By carefully considering these variables, you can make informed decisions and ensure the financial viability of your operation.

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https://agecoext.tamu.edu/resources/decisionaids/beef/

Abello, Francisco. “Effect of Interest Rates on Beef Cow Bid Price.” Southern Ag Today 3(33.3). August 16, 2023. Permalink