Low interest rates mean farmers can afford to borrow a lot of money to buy land.
But they could find that land investment is hard to carry if interest rates rise, a top American agricultural economist told the Manitoba Special Crops Symposium.
“Don’t get caught in the cheap money trap,” said Virginia Tech’s David Kohl. “If anything happens to interest rates or commodity prices, we could see land prices level off or even devalue.”
Kohl, on a tour sponsored by the Royal Bank, warned farmers against buying land on the assumption that it always rises and can be sold to pay mortgage debts if they become unmanageable.
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Land values don’t always rise, Kohl said. U.S. farmland prices fell last year for the first time in 21 years.
Unlike many investments, he added, farmland brings with it no automatic dividend payment, which is a key consideration when interest rates might rise in the next few years.
“Land is a wealth accumulator, but not necessarily a cash flow generator,” Kohl said.
The fat years of the 1970s, when North American farmers made lots of money, led to the farm crisis of the 1980s. Too much of the 1970s profits went into bidding wars for farmland.
“You can get a frenzy or a greed cycle going, but that just gets capitalized into the land,” Kohl said.
Heavy mortgage debt from land buying and slumping crop prices in the 1980s squeezed farmers. Kohl said farmers who survived learned that lesson, but it is the distant past for young farmers today.
“We’re a generation away from the 1980s,” he said.
“When I was coming out of school, we were a couple of generations out of the 1930s and I didn’t want to know about it.”
Kohl said today’s low interest rates will likely rise in coming years.
Farmers need to build up cash reserves so that interest rate hikes don’t destabilize their farms and they can borrow money when necessary.
“Stash that working capital,” he said. “Have you built your financial fortress?”
Kohl said farmland prices have increased greatly in recent years and are alarming.
“I don’t know if we are in a bubble, but we are definitely late in the cycle (of increasing prices),” he said.
