All the trade issues are well known. So is the weather risk. While farm income levels have been exceptionally strong over an extended number of years, the party in the grain sector seems to be ending. Finances are tightening up and the years ahead could be a struggle.
As farmers, we often point out that we’re price takers both when we sell our grain and when we buy inputs. We have limited control at each end of the equation. But there’s one big expense we do control, one big expense that can become an albatross and that’s the cost of land.
This applies to both the purchase price of farmland and land rental costs.
If you’re going to farm, you obviously need a land base and if you didn’t inherit it, you have to either buy it or rent it. Most producers have a mix of owned and rented.
Outside investors are often blamed for chasing land prices higher, but in most cases demand from farmers has been the biggest factor in the meteoric rise.
With year after year of increase, the belief has been reinforced that land values will never drop. Land always appreciates in value, don’t you know? Well, for a long period in the 1980s, land dropped in value year after year.
It will take a lot of economic pain for that to happen again, but it’s not outside the realm of possibility. As long as land holds its value, your net worth statement might look positive, but you might still struggle to pay the land loan.
There’s increasing pressure for governments to do something and there are logical improvements that could be made in farm safety net programs, particularly AgriStability. But why should governments commit a lot of new funds to prop up the producers who outbid their neighbours for land?
If you paid too much for land and are struggling to make your payments, sell some of it to get your financial house back in order. Don’t expect taxpayers to compensate you for a business decision that went bad.
These principles are even more applicable to rented land. Paying land loans is typically a long-term commitment. Cash rental agreements are usually less than five years and are often two or three years. If you can’t afford that $80, $100 or $120 per acre cash rent, do something about it when the agreement comes up for renewal.
If you lose the land because someone is willing to pay a higher rent, so be it. What’s the use in renting land at a loss? If someone else wants to lose money, let them.
In the aforementioned 1980s, which seem like ancient history to younger folks, there were areas of Saskatchewan where landlords had trouble renting out land at any cost. In many instances, you could rent land by just covering the property taxes.
Many farmers have now become so growth oriented that they covet expansion at all costs. Farms that rapidly expand are always the talk of the town and many farm financial experts have advised over the years that if you aren’t continually expanding, you’re falling behind.
While farms on average will continue to grow, expanding at all costs can be a formula for disaster. In the good times, you look like Warren Buffet. In the bad times, you wish you were an American farmer where subsidy cheques more readily flow.