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n. Illinois | This original article is spot on.
Anyone that thinks that the returns that C-SB farmers have had for 2020-2022 is sustainable. ( $600/ac cash return after operating costs and before land costs) is going to get into trouble. Illinois is already projecting a cash return of roughly $380/ac return in 23 and same in 24. the Fed has made it very clear the cost of capital is not coming down anytime soon. This is what saved everyone after the reduction in income during 2014-2019 after the bull years of 2010-2012. The Fed forced down the cost of capital which help keep land prices from correcting. All of you who is planning on the Fed going back to zero soon on interest rates are in for a rude surprise.
Land values are a lagging indicator. Land values continued to increase in the early 1980's long after the earnings had faltered. Same thing happened after the bull market of 2010-2012. Land values went up in 2013 and only marginal dropped in 2014. Land sales are still high because no one has had to deal with the reality of lower earnings. Its coming and sooner than you think.
The financial institutions have also all taken on the cost of the fixed rates and for the most part are naked (IE they do not have all of their fixed rate exposure hedged off to someone else) just like my cattle feeders who promised to put a floor on the fats via a put option; they never have them all covered its just part of human nature and the CFO who is in his mid 40's has not idea of what happened in the 1980's because he/she was still in diapers then.
There are stories in the WSJ where regional bank are going to shrink their loan portfolio because they can only raise funds via the hot CD market that is costing them way over 5% and they can't get enough spread to make sense to continue to grow. Throw in the reality that the bankers also have a bunch of bonds that they would have typically sold off to generate cash to fund new loan growth and if they were to sell now before the bond matures they have to actually book the loss vs it being just a paper loss.
Farm Credit is not immune from this either. Their current 3-5 year bonds are costing over 6% to sell and that is to fund a bunch of 3-4% 20-30 yr fixed rate mortgages that they also payback 1% on their dividends. Compeer's current cost of funds as of 9-30-2023 was 3.05% and going higher.
The question you have to answer for yourself is this. If something does not change (earnings or cost of capital) and land values adjust to this new reality, Are you ready for a 40%+ decline in land values? is your current lender?
In the 1980's neither the borrowers nor the lenders were ready. I have personally seen to many deals where we are ignoring the basics of prudent lending IE keeping the land payment at a reasonable level per acre. IE land payment is pushing over $400/ac and no offsetting strengths besides 2020-2022 were really good years.
One more observation about the 1980's In the end it was the small minority of the operations that got into financial trouble, but that small minority create havoc for everyone.
Yes long term land values go up but the short term can be horribly cruel, Read about the 1980's and 1930's and also go back and read of the 1870-1880's massive corrections in those time periods.
Edited by Reality speaks 11/16/2023 14:49
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Kubs Den “ INSANITY OF PAYING 7% ON AN ASSET (FARMLAND) THAT ONLY EARNS 2%”
