Rudolphi's Burning- Get on with IT!

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February 18, 2013 11:11 AM

Get on with IT!

Everywhere you go, people talk about it.  In the Ag world, nearly every conversation is started in reference to it.  Every publication and magazine has at least one article dedicated to the topic.  I can’t even attend a family function or visit with a random person on an airplane without hearing commentary in regards to the land market and prices being received for acres of farmland. 

Most of the comments that routinely annoy me are of the following variety…. “How high is land going to go?”…… “Do you think it’s a bubble?”……“I just don’t understand how they can make that work”….. “It’s all these investors driving up the price…making it hard for the farmers to compete”……. “Will we see a repeat of the 80s?”…. “It’s getting to where a young person just doesn’t have a chance anymore.”

After being drawn into a countless number of philosophical debates over the last couple of years, I have finally drawn a conclusion to just about all of these questions.  They are as follows….  “I don’t care”…”I don’t care”…. “They aren’t and they don’t care”…. “Who cares” ….. “No”….. “Sure, if that’s what you want to believe”.  I am going to now spend the rest of the article elaborating a little on why I, they, and you shouldn’t care.

“How high is land going to go? I just don’t understand how they can make that work.”

I’m not discounting the fact that land is expensive, really expensive, frickin’ crazy expensive.  It’s higher than 2 community college freshmen that just scored their first dime bag.  But, the fact remains that in the case of most farmers it doesn’t matter how high land goes or whether or not a correction takes place in the land market. 

Producers that went into the last few years with momentum have war chests full of money.  In addition, the mentality of most farmers is that once a chunk of ground is purchased by them, it will never be sold by them.  Therefore, if one has necessary cash flow to make the purchase work and never intends to cash in on market appreciation, it really doesn’t matter what happens to the value of the asset. 

Farmers are continuing to purchase land at these prices for 3 reasons; they can cash flow it, they want to expand their business and portfolio, and owning the next 80 acres is more important to them than a higher rate of return that could be achieved on their money somewhere else.  From an ROI standpoint, high priced real estate makes very little sense, but it is important to keep in mind that what farmers bring to the table in terms of work ethic and passion, they typically give up in imagination.  Thus, with land being the only target for their money, there are very few limitations on what they can actually pay for the 80 across the fence.  Their only limitation is their conscious which is concerned about the rumor mill at the local card club. 

Do you think it’s a bubble?  Will we see a repeat of the 80s?

No, I don’t think we will see a repeat of the 80’s.  It is very possible that we will see a correction in the land market at some point, perhaps even a blip or burst of sorts.  When that happens, most everyone will be unaffected and continue operating business as usual. 

The one reason that brings me to this conclusion is that while the land market has escalated to a very high level, the banks have backstopped the rise very well.  Unlike the 1980’s no lending institutions (at least none that I know of, please call me asap if you find one otherwise) are loaning money on asset value.  Most banks are only willing to lend $5500-$6000/ acre.  FYI…this is not some arbitrary number that a guy behind a desk threw a dart at a board one day and landed on…this is where the stuff cash flows using trend yields and moderate commodity prices.  With these parameters in place, most purchasers are quite secure (again back to that war chests full of money thing) and it will be difficult for the bubble to burst too violently.

“It’s all these investors driving up the price…making it hard for the farmers to compete”

Investors, while interested in owning land are not interested in owning high priced land.  What does any investor want? A cheap asset with a high rate of return—who wouldn’t?  $400/acre rent on a $15,000 asset represents a 2.66% rate of return.  To your garden variety, non-farmer, Wall Street type investor this return just won’t cut the mustard.  Investors are not interested in these types of purchases.  Most investors can be found in the market today strictly playing defense.  Making sure something just “doesn’t go too cheap”.

The notion that farmers and non-farmer investors are enemies is asinine.  Sure it’s easy to get sour when you get beat out on a purchase, but then you have to step back and think to yourself... What’s the next best thing to owning a farm?  Renting it.  Putting your operation in position to do business with an investor or investment group could be a really cool deal for any farmer.  Yes, they might ask a little more in rent, make you manage your operation a little better, take a little of the gravy out of it, but hey if not you, then who?

“It’s getting to where a young person just doesn’t have a chance anymore.”

Let’s face it…it has never been easy or non-capital intensive to get started in production agriculture.  There has never been a guarantee of easy money, or even a guarantee of compensation.  It is a commodity business.  Farming is not similar to the technology sector where new “property” can be pulled out of thin air.  We produce very tangible products that have a very specific value.  That is just the nature of the game.

However, the notion that new farmers cannot make it today is far from true.  Bringing different approaches, business acumen, and production models can prove to be highly effective in a mature industry such as faming.  Is the entry cheap, easy, or without significant risk? No, but no business venture on earth is. 

To gain entry to the market one is often forced to work harder, smarter, and willing to accept more risk than that of those already in the game.  There has never been a period of time in which this has been different.  The opportunities that are out there and available are endless…Will they require significant sacrifice and a “nose to the grindstone approach”?  Of course they will, but the only producers who are truly going to succeed are those that eat, sleep, and breathe their business. 

So we all might as well quit pondering the land market and get to work!

Editor's Note:

Rob Rudolphi resides in Eastern Iowa with his lovely wife Tara, where he is involved in several agricultural businesses. They currently have no kids, no dogs, and certainly no cats, and are generally up for anything involving a good time!

The mission of the column is to advocate agriculture, entertain (provided that you are entertainable), serve as a catalyst for critical thinking, and challenge the status quo amongst the agricultural community.

If you have a idea that would make a good "Burn Topic" for next month's Rudolphi's Burning column, please email the idea to prburmeister@gmail.com All entries will remain anonymous.