Jim Knuth, Farm Credit Services of America, spoke recently at the 2022 Land Expo on the changing landscape of American land value and how farmers can make the most of the land. He hit on three topics — land value, interest rates, and grain production.
Land value has moved for the first-time since 2014. Knuth states that this year marks the highest one-year trend since benchmark history. He believes it is common sense for land values to be looked at and that they will soon level off.
“Do I think that trend is going to continue through 2022?” says Knuth. “I don’t know, but not likely. Some of these tailwinds may not be as strong moving forward. What is the secret to this? All the stars aligned. We had interest rates driven clear to the floor by the pandemic and had significantly higher grain commodity prices with all the influx of government money.”
Knuth says we also have the answer to what would happen if a significant amount of land hit the market — it would get absorbed by willing buyers, because they are not hard to find. Buyers have capital and collateral, and the ability to absorb any excess supply. But Knuth says there is a reason this economic trend won’t last.
“The real question, as we look at the market today, is how will it continue to reconcile the long-term nature of the land asset with some of the short term,” says Knuth. “How long will these margins last? How long will this last? I think that’s the key going forward.”
Knuth believes 2021 was a very dynamic year for interest rate policy. Inflation, unemployment and consumer spending are the three main factors that determine interest rates and monetary policies. Agriculture doesn’t have much of a hand in monetary policy, despite the impact monetary policy has on agriculture.
What can the Federal Reserve accomplish? It can raise short-term and variable interest rates. Knuth predicts this will occur in small 25-point increments in February and then repeat three to four times in the year.
“That means we’re going to be at 4%, maybe 4.25%,” says Knuth. “Then it’s going to taper its bond buying activity. In other words, it’s going to take demand or liquidity out of the market. It’s already doing that. That’s going to cause long-term rates typically to rise. We’ve already seen that in our 10-year treasury benchmark.”
However, Knuth says, rising interest rates doesn’t mean high interest rates, because the industry is coming from a year of all-time low interest rates.
Another option for the Federal Reserve is to keep interest rates at the same level but to extend the term beyond 20 years to 30.
“Right away you see that and go ‘Wow, that savings is double what the interest rate was,’” says Knuth. “That’s the point a lot of people don’t understand. Typically, it’s the term or the amortization of your debt that has the single biggest impact on the payment, the cash flow relief, and a restructure.”
Knuth believes that the best option is to increase short-term interest rates or extend the term to create a third option.
“Do you know what the price of corn will be in two years or three or five?” Knuth asks. “No, neither do I. It is important to amortize as long as possible. You might need it when times are tough. But when times are good, understand what you’ve done and pay that debt ahead. It’s a little bit like having your cake and eating it too.”
Grain production in agriculture
According to Knuth, corn and soybeans aren’t supply driven products like some of their agricultural counterparts, but demand driven. The United States used produce more than 2.2 billion bushels of corn. Now it produces less than 1.5 million. Knuth claims that the corn demand boom came from China and we are now seeing less corn production due to less demand.
Knuth advises producers to consider their selling and planting strategies for 2022 and 2023 after a historic demand spike.
“2022 is shaping up to be another profitable year,” says Knuth. “Our prices are good, but our one caution is to get ready for the margin squeeze. I’d get ready for the margin squeeze because everything’s more costly. Fertilizer is the obvious one, but it’s also fuel, seed, cash rent, and machinery.”
Knuth predicts volatility in the markets this year and stresses the importance of risk management and marketing decisions. However, he said volatility doesn’t always mean bad things; it can bring opportunities if you are ready for them.
Food for thought
Knuth believes there are many important lessons from the last time this type of economic cycle was seen that we can use to improve our future.
“This party’s going to end too,” says Knuth. “I think the whole point is what knowledge, what insights, and what realities can we take from the last economic upcycle that we can apply to today?”
Cost structure is key. It can appear that farmers can afford every piece of machinery they need and still make a profit during upcycles. Being thoughtful about capital expenditures and expansion, thinking ‘What will this do to your costs?’ can help to set up a good cost structure.
“Remember, the goal of every grain producer is to have a high-revenue, low-cost operation,” says Knuth.”
Working capital is the key to balance sheet risk management. Knuth says that working capital is the first line of defense for risk absorption. Liquid assets allow you to borrow and have the flexibility to do so. With any business, it’s difficult to operate without working capital.
When making financial decisions, consider all your assets.
“We’ve seen a lot of farmers think about their operation in pieces,” says Knuth. “That thinking is actually wrong. It can really lead to some poor decision making.”
Knuth suggests that you look at farmland per acre and machinery costs per acre separately, and to consider your entire operation holistically.
However, it can be difficult to understand your financial position. Knuth suggests that you also look at your operation after capital expenses. Thinking about what the operation will look like after the decision is made — how it will impact your cost structure or working capital, how much financing it requires — can be a huge asset to making the decision of whether it’s worth it.
Knuth’s last lesson is that agriculture will continue to have a dividing line. The difference he sees isn’t about how you fertilize, the crops you grow, or the color of the machinery you use.
“Producers increasing their business and finances are being rewarded. They’re continuing to separate themselves,” says Knuth. “What they do is fairly simple. They spend as much time in their office as they do their shop and their fields, and they spend as much time running their business as they do running the tractor and the combine.”
Source: Successful Farming