Record Farm Income, Dangerous Farmland Prices

Record Farm Income, Dangerous Farmland Prices

Net farm income is forecast by the USDA to rise 15.1% over 2012 to $131B in 2013. However, net cash income is expected to be marginally lower by about 3% to $129.7B due to higher year-end inventories. Even adjusted for inflation, this is higher than the historical norm.

Sector rebounds from the 2012 drought

Farm incomes are seeing a boost from the higher productivity seen in crops, livestock, dairy and poultry after the sector bounced back strongly from the effects of the 2012 drought.

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“Not all crops produced in 2013 will be sold by the end of the 2013 calendar year; we anticipate substantial increases in the annual quantity and value of crop inventories, particularly for corn,” says the USDA.

However, the USDA apprehends lower effective price realizations for corn, wheat and soybeans. Higher prices are expected for broiler, milk, and hog.

Rising farm income points to a bubble?

Could rising farm incomes between 2010 and 2013 be fueling a bubble in farmland prices? During Q3 2013, farmland returns were up a hefty 3%, showing buying interest in farm assets. Apprehensions of a bubble forming in farmland were aired by Robert Shiller in this interview.

“Farmland values are expected to continue rising, given the relative strength of commodity prices, accommodating interest rates, and expectations of continued favourable net returns both from the market and from government programs, including crop insurance,” says the USDA in its projections for farmland assets, debt and wealth.

But the balloon may already be deflating…

A monthly survey by Creighton University said its farmland price index plunged in December to 47.0, down from November’s 54.3. The December reading is the lowest level seen since December 2009. “This is the first time in four years that the farmland-price index has moved below growth neutral. As agriculture commodity prices have moved lower, so have farmland prices,” says Ernie Goss, the Jack A. MacAllister Chair in Regional Economics at Creighton University.

This is apparently being confirmed by another indicator – sales of farm equipment, which have remained below growth neutral for the sixth month on the trot. “Over the past year, grain prices have declined by roughly 35%. This has significantly reduced farmers’ willingness to purchase agriculture equipment,” says Goss.

Flat agro-commodity prices could nick farmland by 10% in 2014

Terry Kastens, agricultural economist emeritus at Kansas State University, says US farmland values are at a “tipping point” and could plunge by as much as 10% in 2014 due to soft commodity prices. “We’re at a point where land values are going to quit rising so rapidly,” he says. Prices will “probably flatten out and may even fall back 10% or so, but we’re not going to see some crash.”

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