What Effects Will Higher Interest Rates Have In Agriculture?

rising interest ratesAs we roll into 2014, farmers and landowners are looking ahead to see what the new year will mean for commodity prices and land values. One of the main indicators affecting these prices is the interest rate. Producers wonder whether they will see an increase in interest rates in 2014, and if so, how that will ultimately affect their farming operations.

After nearly a decade of burgeoning land values resulting from high commodity prices combined with extremely low interest rates, 2013 and 2014 might bring about a market correction in this area, and it seems as if the value of farmland has peaked for the time being. The first half of 2013 saw slight increases in the interest rate, along with falling commodity prices. As a result, land values seem to be leveling off.

In a report entitled, “Land Values Peaking Out—But Not Down,” Sterling Liddell, a senior analyst at Rabobank Food & Agribusiness Research and Advisory (FAR), predicts that while commodity prices will likely be lower in the coming year, they won’t be low enough for long enough to substantially affect land values in the short term.

However, Liddell also notes that the greatest risk to land values is higher interest rates. Since interest rates can hardly go any lower than they have been in recent years, it’s a widely accepted assertion that they will inevitably rise. When might this increase take place? Based on current Federal Reserve Policy, substantial increases aren’t forecasted until later 2014 into 2015. According to analysts at the web-based Farmland Investor Center, “More specifically, the Fed has said that it will hold short-term interest rates near zero as long as the unemployment rate remains above 6.5% and inflation expectations one to two years out remain under 2.5%. The Fed projects the unemployment rate could fall to 6.5% in 2014. But most Fed officials expect to hold off on a rate increase until 2015, according to an internal assessment of monetary policy.”

While it’s widely known that higher interest rates negatively affect land value, what’s less known is to what degree. Jeff Caldwell of Agriculture.com postures that land values are likelier to respond more sharply to interest rate increases in the current market climate, since a market indicator known as the capitalized value of land is so high. “The higher the capitalized value, the more the land is being influenced by factors like low interest rates, thereby making it more susceptible to value declines when those factors change.”  Thus, Caldwell posits that a rise in interest rates would affect land values more quickly and more sharply now than it might when the capitalized land value is lower.

In the meantime, no matter when or to what degree interest rates increase, it’s more important than ever for farmers and landowners to keep a close eye on their input costs and marketing as they’re faced with the likelihood of land value decreases and interest rate increases in the foreseeable future.

If you would like to evaluate your options as a land owner, contact a UFARM professional land manager. Consultations are free.

 

Sources: “Falling Land Values? Watch Interest Rates.” Web log post. Agriculture.com. Caldwell, Jeff. 27 Aug. 2012. Web. 02 Jan. 2014.
“Era of Record Low Mortgage Rates Ending as Fed Begins Paring Back Bond Purchases.” Web log post. Farmland Investor Center. N.p., n.d. Web. 02 Jan. 2014.

Will Farmland Owners Pay Higher Property Taxes in 2014?

As 2013 winds down, farmers and landowners turn their attention to the Nebraska Legislature, which convenes for another Legislative Session in January. One of the main issues that the legislature will discuss is the need for property tax relief, a Landowner Property Taxtop concern of not only farmers and landowners, but also of Nebraskans as a whole. What is the outlook for property taxes in 2014? Will farmers and landowners finally see some relief?

Nebraska Farm Bureau president Steve Nelson hopes so, and he led a committee that presented a multi-year tax relief plan in October. The plan would reduce the state’s reliance on property taxes to fund government services and strive to better balance the contributions from property, income, and sales taxes. Its overarching goal is property tax relief, and Nelson hopes that property tax relief will be the main focus of any comprehensive tax reforms proposed in the Legislature.

Nebraska property taxes comprise 45% of all the taxes collected statewide, and the reliance on property taxes has steadily been mounting since the 90s. Farmers and landowners are increasingly feeling the pinch each year. According to the Nebraska Farm Bureau, agriculture land owners comprise roughly 3% of the population, but pay about 24% of the total property taxes across the state (“Nebraska Farm Bureau Plan Seeks to Balance Tax Structure, Provide Property Tax Relief.” Online posting. Farm Bureau –. N.p., 17 Oct. 2013. Web. 16

Dec. 2013). One part of the Nebraska Farm Bureau Committee’s plan would be to reduce the value of agricultural land for tax purposes from 75% to 65%, among other ideas for tax relief.

The Nebraska Farm Bureau committee presented its plan to the Nebraska Legislative Tax Modernization Committee, which also just released its own conclusions and recommendations. The Tax Modernization Committee was formed at the end of the last legislative session, its goal to study tax reform options and present their recommendations for the 2014 session.

In a report released Friday, the committee recommended no major changes. “The report says taxes are higher than average in some areas. Property taxes are greater than both the national average and that of most of Nebraska’s bordering states. Lawmakers also concluded that income tax brackets have not kept pace with inflation.” (Young, JoAnne. “Tax Modernization Committee Makes Recommendations, Some Members – KHGI-TV/KWNB-TV/KHGI-CD-Grand Island, Kearney, Hastings.” Tax Modernization Committee Makes Recommendations, Some Members – KHGI-TV/KWNB-TV/KHGI-CD-Grand Island, Kearney, Hastings. Lee Enterprises, 15 Dec. 2013. Web. 16 Dec. 2013.)

Four members of the committee have refused to sign the committee’s report, and two of these four members are seeking Governor Heineman’s seat. Charlie Janssen and Beau Mccoy each say that a greater need for more overall tax relief—including both property and income tax relief—and less spending is necessary, and Janssen plans on releasing his own alternate proposal.

In the meantime, committee chairman Galen Hadley did stress that despite no recommendations for major changes, there would still be a focus on property tax relief. This will come as welcome news to farmers and landowners across Nebraska. However, it is anyone’s guess as to if this relief will actually materialize, and if so, how quickly it may come. For now, all eyes will be on what transpires during the 2014 Legislative session.

The professional land managers at United FArm and Ranch Management can help you make wise business decisions for your land.  Contact UFARM today!

Nebraska Fall Wheat Planting Update

Wheat-Field-small

 Along with corn and soybeans, wheat is one of the top crops in Nebraska. Many Nebraska farmers take advantage of wheat’s unique growing capabilities in order to maximize their land use and profitability.

Nebraska is one of the top ten wheat producing states in the country, and Nebraska farmers have produced as many as 84.28 million bushels in 2007, the same year that saw the greatest acreage of wheat planted in the state at 2.05 million.

In Nebraska, wheat is primarily grown in the western half, although farmers from all across the state plant it in the fall to harvest in the spring, known as winter wheat. The recommended winter wheat planting dates vary across the state. The north and western parts of the state have an earlier planting time, while the south and eastern areas can see the fall planting into later parts of September and even early October. Generally, fall planting of wheat in Nebraska is recommended between September 1st and October 1st.

Wheat is also a popular choice of cover crop in Nebraska. The seed is readily available and relatively inexpensive, and it is easy to establish and fast growing. Planting a cover crop has many advantages. It prevents wind and water erosion, can increase yield, improves soil, and adds or preserves soil nutrients that might otherwise be lost to leaching. Animals may also be grazed on the cover crop before spring planting takes place.

Despite its advantages as a cover crop, however, wheat does use up excess soil moisture, and some agriculture experts caution against growing it as a cover crop in the Nebraska Panhandle, since the average rainfall is less and evaporation rate is generally higher than in other parts of the state and country. As a result, the disadvantages of its use as a cover crop in this area of the state may outnumber the advantages.

Winter wheat benefits from snow coverage in order to prevent winterkill. Studies have shown that a blanket of snow 3 inches deep is sufficient to protect it from the cold, and 4-6 inches of snow cover offers the best winterkill protection.

Fall wheat planting across Nebraska was slowed by rains for a week or two in late September, and while proper timing is key for wheat planting, a moist soil profile is still a welcome change to last year’s dry planting conditions for winter wheat.

At the end of September, the USDA reported that 65 percent of Nebraska’s winter wheat planting was complete, compared with a 72 percent average for the end of September. The moisture improved the overall prospects for Nebraska’s next wheat crop. Overall, the USDA reports 56.52 million acres of wheat planted for 2013-14, up slightly from last year’s 55.74 million acres.

As with any crop, weather conditions have the most significant effect on crop growth, yields, and the planting and harvesting of crops. With the majority of Nebraska’s wheat sown, farmers will wait to see what winter weather conditions will manifest.

United Farm and Ranch Management can provide year-around care for your Nebraska property.  If you would like a customized plan for your farm or ranch, please contact a UFARM professional today.

 

When is the Right Time to Sell the Farm?

“Don’t sell the farm,” or “I wouldn’t bet the farm on it,” are well-known idioms, and for good reason: They are a very fair representation of the high stakes that accompany such a venture. Over the last decade in Nebraska, with a growing number of farmers and landowners at an advanced age, knowing how to go about selling their farming enterprises or passing them down to their children is fraught with difficulty, and there are many issues farmers must take into account when going about estate planning and passing along their life’s work to the next generation.

Selling the Family Farm

One such issue that must be taken into account is quite obvious, but often overlooked: Do the children actually desire to carry on the family farm? Often, this fact is simply assumed, and parents make arrangements early-on, only to find out too late that the sons or daughters have very little interest in farming. If this is the case, it is in the best interest of all involved that they hire a professional farm management company or sell the asset to an interested party, so that the money is able to benefit the family and allow them to pursue their own aspirations.

Many experts advise that parents sell—rather than gift—the farm to their kids. This ensures that the kids do, in fact, desire to farm since they are buying it with their own capital. This way, there is “skin in the game,” and the farm benefits as a result.

Perhaps the largest factors affecting the sale of farms are the tax consequences. Navigating the myriad federal and state capital gains, estate and inheritance taxes is tricky. Inheritance taxes, aka the “Death Tax,” can be an especially difficult tax to handle, especially for small businesses and for family farmers and ranchers. Often, those on the receiving end of farmland from the previous generation are forced to sell that land in part or whole just to pay the taxes. Nebraska is one of only six states nationwide that has a separate state inheritance tax, so Nebraska farmers must contend with this extra tax as well. Experts emphasize the importance of seeking sound legal counsel as well as to obtain advice from those with expertise in farm management in order to minimize the often crippling tax burdens that can accompany the inheritance of the family farm.

Above all, it’s important for farmers to have a plan. It’s never too early to start planning one’s own future business succession, and it’s simply another part of farm management.  If working with a farm  management company, have copies of reports sent to adult children, so they can learn about the farm before the parents are gone. A lack of planning can put huge amounts of stress on families, and even sometimes tear them apart due to bickering among siblings about what to do about the farm or land that they’ve inherited, in part or whole. This plan will need to be reviewed often, and perhaps will change many times due to varying outside factors, but at least there will be a plan in place to guard against such instances.

If you need assistance managing your farm or transitioning your land for the future,  please don’t hesitate to contact us at United Farm and Ranch Management .

 

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Nebraska Farm Land Prices: When’s the right time to buy or sell?

Land PricesIt’s a popular topic at every rural coffee shop: Will land values remain this remarkably high? It’s a good question.  With values that have been rising steadily over the last 20 years, and that have seen even larger gains in the last two to five years, farmers and landowners wonder if conditions will remain in place that will maintain these rates for the foreseeable future.

Rising land values have especially impacted farmers and landowners in Nebraska.  According the USDA, Nebraska’s all-land average value has doubled in the last five years, and in some areas has increased more than 125%. Additionally, the USDA’s land value survey reported a 33% increase for Nebraska farmland—the highest percentage gain of any state in the nation.

Conversations that involve record value gains in any market will include references to booms, bubbles, and bursts, and farmers and landowners in Nebraska are particularly aware of this. Many current producers experienced—or saw their parents experience—the farmland bubble burst in the 1980s, and are keenly sensitive to this issue today. Is the current farmland value bubble about to burst?

The answer to this question requires a basic understanding of what factors affect the rise and fall of prices. What has contributed to these record gains in Nebraska farmland values?

One is the current US monetary policy, with record low interest rates and a weak dollar. The weak dollar encourages agriculture exports, while the low interest rates discourage landowners from selling their land, thus creating a scarcity-driven land market and rising land values. Some agricultural economists predict that land values are set to go down, just because interest rates cannot go any lower than they are currently.

Another factor that affects land values is the US and global economies. Poor economic gains in both the US and global economies will eventually affect the disposable incomes of American households, and will in turn affect food prices.

Finally, and perhaps most obviously, commodity prices affect land values. Last year’s record drought forced commodity prices up, which in turn brought even greater land values to Nebraska and area states. Favorable weather conditions for the 2013 growing season will bring commodity prices down, which in turn might end up bringing farmland values to lower levels.

The outlook for Nebraska land values is up to debate. Some economists think that while there will be some more significant corrections in the land market—especially in states like Nebraska that have seen the most dramatic value increases—the chance of another burst is far less likely, simply due to the fact that today’s farmers are not as seriously leveraged as they were in the 1980s.

One thing is certain: Farmland prices are sure to remain a top concern for Nebraska farmers and landowners as we head into the 2013 harvest season. Please don’t hesitate to give us a call at United Farm and Ranch Management for any questions or concerns you may have when it comes to your land values and rental income.