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The outlook on farmland

The outlook on farmland

By Denise Faris

Dr. Gary Schnitkey, professor and farm management specialist in the Department of Agriculture and Consumer Economics at the University of Illinois, gave us an outlook on farmland for the coming year at our September meeting. He related that there are normal corn and soybean yields this year. Incomes are projected to be low, just as they were in 2005; however, many of Illinois farms are in strong financial condition. Dr. Schnitkey also noted that in 2014, intermediate assets increased. Currently, debt has not declined on farms, if anything, it has increased.

“We are looking at going into very low net incomes, lower than during the five year period from 2000-2005,” Dr. Schnitkey observed. “While many farms are in strong financial positions, there are a number of farms that have cash problems. Part of the reason is less revenue from corn.”

He said there is a strong need to reduce cash flow due to the commodity prices. “Due to reasonably good crops worldwide, there are not any supply problems around the world,” Dr. Schnitkey said. “Right now, I am not bullish about the short-term outlook in other countries’ economies.”

Dr. Schnitkey also shared:

• There are higher gross revenues than in 2005, but costs have risen
• Non-land (fertilizer, seed, insurance, machinery) costs for corn crops has increased from $320 per acre in 2006 to a projected cost of $585 per acre this year
• Non-land costs have to be reduced in order for gross revenues to increase
• Machinery depreciation will come down, but very slowly over time
• There may be some reduction in fertilizer prices
• As long as corn is under $4 per bushel, there will be downward pressure on cash rents
• Farmers need to initiate a $100 cost reduction for 2015
• Those in cash rent situations might want to consider going to variable cash rents
• Leases should be evaluated each year, most cash rents lag behind economy conditions
• Seed prices are holding steady because share holders don’t want to see lower prices
• The return on investment on farmland (cash rent minus property tax) is 1.5 percent – 2 percent.

“Over time, farmland is a very good investment; on average it out performs the stock market, but you have to hold it a long time,” said Dr. Schnitkey. “If you sell your land, where do you put the proceeds? Everything is risky.”

He went on to say, “We should hope for growth in the Far East within the next five years. We have to hope China buys soybeans and corn to feed its livestock so they can feed the Chinese population. We need that demand. We thought continued growth would come from Africa, but that is a hard case to make.”