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Higher interest ratesIt’s January, and as many are setting their personal goals for 2015, farmers and agriculture economists are also keenly interested in what the new year will bring for ag producers. With 2014’s lower commodity prices in mind, farmers are paying close attention to rumors of rising interest rates in 2015.

According to Fortune magazine, the Federal Reserve will begin to raise interest rates sometime in the coming year. The rate hikes signal a tapering of the Fed’s “quantitative easing” strategy of the last several years, the goal of which was to bring down long-term interest rates in an effort to stimulate business borrowing and spur the economy during the recession. While opinions vary regarding the timing of the increases, two officials with the U.S. Central Bank said the timing will depend upon the economy, although most agree that it will take place within the next 12 months.

What do these rising interest rates mean for your farming operation? Rising interest rates can spell disaster for some farming operations, as was the case when rates spiked in the 1980s. It’s important to gauge the events on the horizon, and take steps now to cushion yourself from the effects. Here are three things to keep in mind.

The first is to consider re-financing now, even if it’s only a short-term, one-year restructuring. It’s far easier to make changes sooner than later, when farm values are still relatively high and income statements are favorable from the last several years. According to Bob Campbell, senior vice president of Omaha-based Farm Credit Services of America, “If you wait a year or two and the cost of production is higher and your cash is drained and you have no cash flow, you won’t have the strength in your balance sheet and income statement to re-finance. Now is the time to tweak your income statement to give it some breathing room.”

Another thing for producers to keep in mind heading into 2015 is to manage their taxes wisely, and ensure that they aren’t heading into a new year with no equipment write-offs and no money to pre-pay expenses—income but no deductions. Ag finance experts encourage producers to pay attention throughout the year and make the necessary decisions sooner than later.

Finally, it’s important to keep in mind the effect of rising interest rates on land values. Experts predict that a rise in interest rates, coupled with a stronger U.S. dollar and bearish commodities outlook, will drive down land values. AgriLife Extension Economist Dr. Levi Russell has this to say:

[Rising interest rates create] an incentive for landowners to sell land and buy other assets with similar risk and higher returns, such as bonds. While a rise in cash rents would mitigate this factor, increasing the return to land (through cash rent) will likely be more difficult due to a bearish commodity price outlook. Additionally, increased interest rates also strengthen the dollar relative to other currencies, which puts downward pressure on exports. This would also be bearish for commodity prices. The implication is that farmland prices will likely fall as rates begin to rise.”

Are you concerned about what higher interest rates will mean for your goals? Feel free to contact a UFARM land manager –we are happy to hear your concerns and help you form a smart strategy for your land.

Sources consulted: “Economist: Low agricultural commodity prices, potential rising rates could lead to land value declines.” AgriLife Today. Texas A&M Agrilife. 09 Oct. 2014. Web. 05 Jan. 2015. Nitchie, Don. “Rising Interest Rates Will Impact Agriculture.” University of Minnesota Extension. University of Minnesota. Web. 05 Jan. 2015. Reuters. “Two Fed officials say interest rates to rise in mid-2015.” Fortune. Time.com. 09 Oct. 2014. Web. 05 Jan. 2015.Williams, Elizabeth. “Farm Finances: Prepare Now for Rising Interest Rates.” AgFax.com.AgFax Media, LLC. 24 Oct. 2014. Web. 05 Jan. 2015.

 

Real Estate Auction Sign-croppedDespite a downturn in grain prices and lower net farm income expectations among farmers and investors across the Midwest, demand for high quality farmland remains strong. A limited supply of such quality ground is contributing to a healthy demand for premium farm acres, even though prices for farmland in general seem to be moderating following the five year boom in land values.

While the primary competitors for such ground are farmers themselves, local investors seeking to expand their portfolios continue to show great interest in obtaining these valuable parcels of ground. When such land become available, both parties show healthy interest and appear willing to pay top dollar for it.

Even with this stable demand, landowners and farmers themselves remain cautious when it comes to investing in more ground. While many are better positioned now, with less debt, than during the 80’s land bust, they are seeking to invest smartly. For many, this means putting more effort into finding only the best quality farmland.

Mike Walsten, editor at Landowner, projects that farmland values in general will fall about 10% this year, based on current expectations. He says that demand for quality farmland will remain fairly stable, while demand for less quality farmland will continue to weaken, especially should profit margins further weaken at the same time.

In the longer term, Walsten is confident that farmers and landowners will weather these market corrections if they show restraint in adding more debt. He cautions that adding more debt to maintain spending will create problems—something that many producers learned the hard way during the 80s land boom and bust. Another factor that could greatly influence landowner decisions are rising interest rates, especially in the latter half of 2015. Higher interest rates would further dampen land values.

Still, investing in farmland remains one of the best and safest long term investments—something that landowners and especially outside investors recognize. One of the main drivers of recent interest in investing in farmland is based on the burgeoning world population, which is expected to peak at 9 billion by 2050, up from 7 billion today. Growth, especially in developing nations, will substantially drive up demand for food. In addition, the quest for biofuels remains a contributing factor to the high demand for quality farmland. In the US, for example, corn grown to produce ethanol accounts for 23 percent of total corn use.

It’s no secret that owners of quality farmland are poised to benefit from such trends, and while land values are currently softening, many experts remain bullish on land values going forward, especially for high quality farmland.

Are you seeking to make the most of your farmland, or are you looking to expand your portfolio and think that land ownership would be a good fit for you? Let the experienced professionals at United Farm and Ranch Management help you determine the best plan of action to benefit your unique situation.

Sources:

Birt, Nate. “Farmland Prices: Demand Ticks Up for Good-Quality Ground.” Agweb.com. Farm Journal. 07 Apr. 2014. Web. 24 Apr. 2014.

Murphy, Richard McGill. “The Best Long-Term Real Estate Investment: Farmland.” CNBC.com. CNBC. 24 Mar. 2014. Web. 24 Apr. 2014.

 

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.

Land Appraisals

When it comes to many aspects of farm ownership, having a good idea of what the farm is worth serves as the basis from which many important decisions are made. Estate planning, dividing land among children, determining fair rental fees or lease terms, and tax or legal issues all depend on an accurate farmland appraisal. Especially in the last several years, which have seen burgeoning farmland values, it is more necessary than ever to have an accurate assessment of land value.

Since knowing the value of the farm and land is such an important part of managing it, it is to the benefit of all involved to seek an expert appraiser to aid in determining its value. Land appraisers are rigorously trained and are licensed or certified in all aspects of property appraisal, and can help walk you through the steps in determining the value of your farm. “The role of the appraiser is to provide objective, impartial, and unbiased opinions about the value of real property—providing assistance to those who own, manage, sell, invest in, and/or lend money on the security of real estate” (Appraisal Institute, www.appraisalinstitute.org.). They do this by putting together various aspects of the property—its physical characteristics, size, uses, and location—and develop a value based upon those specific characteristics.

As with any professional, experience is key. Experienced appraisers can help determine the most accurate value of a property, which is of vital importance. For instance, the failure to accurately price the property is cited as the number one mistake that is made when selling a farm. Failure to accurately assess the value of the farm and surrounding farmland results in less interest from potential buyers, and the maximum value attainable from the farm may be missed.

Another mistake that is frequently made is to determine the value of a property based on a biased appraisal—such as one from a favored lender who sets the appraisal value higher based on the desire to lend money based on that higher value. As a result, the market value of your farm is inaccurate. The best way to determine the value of a farm property is to seek the unbiased opinion of a professional appraiser.

When looking for a qualified appraiser, check that they meet at least the minimum state requirements for property appraisal. Licensed appraisers are better, while certified appraisers have attained the highest level of educational requirements. Both licensed and certified appraisers must pass a rigorous examination that is administered by the state’s appraisal board.

Experts and those who have learned the hard way agree: Don’t miss out on the knowledge that an experienced farm appraiser can offer. Decisions about your farm are among the most important you will make.

UFARM offers appraisal services from experienced, licensed and certified appraisers. They possess years of practical, local land market expertise and combine it with the latest appraisal technology in order for you to gain a clear and accurate value of your land.  Contact UFARM for your appraisal needs.

Estate Planning: Successful Transferring Land to the Next GenerationWhen it comes to land management, one aspect that many landowners often put off for “tomorrow” is planning their estate’s transfer to future generations. However, estate planning is one of the most important actions landowners can take to ensure that one of their greatest assets is handled in a smooth manner once retirement age is reached or in the event of unexpected death or injury. It is essential for all parties involved to know what to expect, and having a plan in place offers peace of mind for both benefactors and those who will inherit land in the future.

There are many factors that must be taken into account when estate planning. Most obviously, experts emphasize the importance of having a legal plan in place, no matter how “settled” the land’s future is among the family. If there isn’t an actual legal document outlining the transfer, the state has the authority to allocate the assets according to state law. Having an estate plan that both outlines the distribution of assets as well as addresses business organization issues is essential for the successful transfer of the land to the final beneficiaries.

When estate planning, it is important to know how best to allocate farm ground among on-farm and off-farm children. Many initially conclude that the most equitable solution is to divide assets equally among all children. However, this avenue fails to take into account the difficulty the on-farm child would have in having enough money to buy-out his siblings, and often results in the land having to be sold to an outside party. Estate planning can address this situation, and allow the family farmland to remain in the family, as well as for all children to benefit as well.

In addition to the transfer of ownership, good estate planning helps reduce and avoid unnecessary taxes. Here it is especially important to have a trusted and competent advisor who is well-versed in tax law to avoid the considerable transfer taxes that can be incurred if not overseen carefully.

An estate plan also addresses many other key issues. It ensures practical ways to generate retirement income. It addresses how a spouse will be supported in the event of an unexpected death or injury, and covers medical and/or funeral costs. It also provides ways to secure a solid financial future for the next generation, including living and educational costs.

Experts agree: It’s never too early to establish an estate plan. In fact, waiting until retirement age can limit the ability to address tax concerns that may arise for heirs should they suddenly find themselves inheriting a large portion of land or other farm-related asset.

Ideally, estate planning is revisited often, since tax laws change frequently, and other factors such as land values can change greatly from year to year. It is important that landowners have trusted advisors to work with through the years in order to help them make these important decisions and to decide how best to manage the transfer of assets to the next generation.

United Farm and Ranch Management can provide complete solutions for your land.  Whether you need assistance with day-to-day management or long-term planning, our farm mangers can help.  Contact UFARM today for a free consultation.

Time is running out for Congress to vote on a newly proposed version of the farm bill, leaving some farmers and landowners in limbo when it comes to making decisions regarding varying aspects of their farming enterprises. The farm bill is renewed every 5 years, and has already seen a 1 year extension after it had been set to expire in 2012. The new extension expired September 30, 2013.

Earlier this summer, the House and Senate hammered out new versions of the Farm Bill. The Senate passed their version in June, and on July 11th, the House passed a so-called “Farm Only” version of the bill, seeking to separate out the supplemental food program (SNAP) from the bill and place it in separate legislation.

The Senate version of the farm bill is similar to the last extended 2008 legislation and includes the food program. It also retains the permanent farm laws of 1938 and 1949. The proposed House bill signals a shift in farm law policy by eliminating the supplemental food program from the farm bill, as well as eliminating the farm laws of 1938 and 1949. Eliminating these permanent farm laws would discontinue direct payments and make other adjustments, thereby saving money on commodity programs in the long run. The permanent farm laws in the proposed House legislation would be replaced with a new Title I, which would ensure that farm commodity programs would continue in the event that a new farm bill is not enacted or renewed.

At any rate, how would the proposed farm bill affect farmers and landowners? At the very least, they will face a bit of uncertainty until a farm bill is passed or renewed. The most immediate effects would be a possible end to direct payments and other various subsidies should some form of the House bill pass Congress.  Many area farmers wonder how proposed changes might affect the crop insurance industry, and how these changes may affect their risk management decisions.

On September 19th, the House succeeded in passing another bill that attempts to address the SNAP benefits portions that has traditionally been included in the farm bill. As separate legislation, it contains $40 billion worth of cuts, out of $80 billion. These cuts would be spread out over a period of 10 years.

Now, the House and Senate need to go to Conference Committee and attempt to meld together the Senate’s version and the two separate House versions and then agree on passage of a new bill.  Will they have the votes, and if so, will President Obama sign it into law, should portions of the House version pass committee containing cuts to the food stamp program?  Time will tell, but these proposals will make for interesting political dynamics in an age of huge deficits and amid calls for fiscal responsibility.

To learn more about how the next farm bill may affect your land and tenants and to learn ways to minimize risk, set up a free consultation with one of our experienced farm mangers.