Thoughts from the National FBM Conference
June 24, 2013
On June 8-13, four South Dakota Farm/Ranch Business Management (S.D. FRBM) instructors attended the National Farm/Ranch Business Management Education Association's (NFRBMEA) annual conference held in Kansas City.
A great deal of information was made available to us, as well as many contacts to concur with on pertinent topics. In this column I will dwell on some issues/observations presented by Dr. Allen Featherstone, Professor of Economics, at Kansas State University on the topic of comparing the current agricultural land price boom to the late 1970's.
Real estate loans to appraised value; 60 percent in 1979, 50-70 percent now. Loans perform for awhile; many of the defaulted loans in 1984-1986 originated in 1977-1980. A positive scenario now is that principal is paid down much faster because of low interest rates. When land values lower, who will buy the land? Seventy five percent of land sold in 2008-2011 was purchased by other farmers. If farm incomes dwindle, and Wall Street continues to recover, fewer parties will be interested in buying. Low demand=lower prices. The default risk is low but also was in 1979. Debt coverage ratios changed from 1.53 in 1979-1981 to .16 in 1985! A double whammy occurred in the farm crisis of the mid 1980's as interest increased by 65.3 percent in conjunction with a 15.7 percent decline in the value of farm production. If both of these scenarios played out today, the ag sector would be looking at a .22 debt coverage ratio vs. the 1.29 now. But we have crop insurance as a safety net, right? Crop insurance price levels are only revenue protection within a season not across multiple years. If the cost of production exceeds the market set insurance price, this type of revenue coverage is much less effective. The fact that many real estate loans are on seemingly low fixed rates is, of course, a positive compared to the 1970s. Revenue is the key. Dr. Featherstone predicts a "bust" will more likely occur from a drop in revenue vs. an increase in interest rates. He also stated that two consecutive bumper crops scare him more than another drought. That may be the case in cash grain country, but in the livestock sector of South Dakota I would certainly beg to differ. This is a prime example of not treating all you hear as gospel. Each producer must adjust his or her goals and assess his or her needs and the opportunities that arise. With the above history lesson, enjoy the bountiful grass we have now as we know how soon it can change. As another presenter commented, on people missing sales opportunities vs. the "headache" of not getting enough, "Make your market decision and turn off your market news service and cell phone!"
The NFRBMEA is an organization the S.D. Center for FRBM looks to for guidance and uniform implementation of our programs. I was elected as secretary of the organization for the upcoming year. You can reach us at http://www.sdcfrm.com or 1-800-684-1969. Contact me at email@example.com or 605-770-0758.