Land Value Considerations in Succession Planning IN Ag Law - - PowerPoint PPT Presentation

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Land Value Considerations in Succession Planning IN Ag Law - - PowerPoint PPT Presentation

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Land Value Considerations in Succession Planning IN Ag Law Foundation Estate and Succession Planning for the Family Farm Jason Henderson Director of Purdue Extension Associate Dean College of Agriculture www.extension.purdue.edu July 2017

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

July 2017

Jason Henderson

Director of Purdue Extension Associate Dean College of Agriculture www.extension.purdue.edu

Land Value Considerations in Succession Planning

IN Ag Law Foundation Estate and Succession Planning for the Family Farm

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Farmland Values Surged in the Recent Boom

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1975 1985 1995 2005 2015

Real Indiana Farmland Values

Top Quality Average Dollars per acre (2016=100)

Source: Purdue University Note: Farmland values adjust with CPI

4.6% per year 4.1% per year 8.0% per year 4.3% per year 3.4 per year 8.5% per year

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 1975 1985 1995 2005 2015

Indiana Farmland Values

Top Quality Average

Nominal Gains are 2 to 3% Higher than Inflation-Adjusted (Real) Gains

Dollars per acre

Source: Purdue University

7.7% per year 6.3% per year 10.0% per year 8.1% per year 7.0 per year 9.4% per year

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Producer Expectations on Farmland

More farmers expect profitability and wealth to diminish over the next 12 months ...

Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/

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… it must be a great time to make a farmland investment.

Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/

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Because land values are going higher.

  • Over the next year, more farmers expect

lower farmland prices.

  • In 5 years, more farmers expect

higher farmland values

Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/

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What Will Drive Farmland Values?

Farm Profitability Interest Rates Non-farm Influences

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Farm Profits are Expected to Stabilize

100 200 300 400 500 600 100 200 300 400 500 600 2000 2005 2010 2015 2020 2025

U.S. Returns to Corn Production Above Variable or Operating Costs

2017 Projections 2016 Projections

$275 to $300 per acre

Dollars per acre

Source: Economic Research Service, USDA

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Global Inventories are Rebalancing

10 20 30 40 50 10 20 30 40 50

U.S. Stocks to Use Ratios

Corn Soybeans

Stock as a percent of Use USDA Forecast

Source: USDA

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The Value of the Dollar will Shape Agricultural Profits

A Strong Dollar …

  • Depresses commodity prices
  • Limits exports

The Dollar is Driven by Financial Flows … Monetary Policy

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

What Will Drive Farmland Values?

Farm Profitability Interest Rates

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Financial Flows are More Dominant than Ever

  • 10000
  • 8000
  • 6000
  • 4000
  • 2000

2000 1976 1981 1986 1991 1996 2001 2006 2011 2016

U.S. Net International Investment Position (Asset Minus Liabilities)

Billions of 2016 Dollars

Source: U.S. Bureau of Economic Analysis

Assets: US purchases Liabilities: Foreign purchases

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Financial Flows are More Dominant than Ever

1976- 1980 1990- 1994 2012- 2016 Exports 315.3 730.8 2,072.4 Imports (367.2) (797.6) (2,548.2) Net Exports (51.9) (66.8) (476.1)

1976 - 1980 1990- 1994 2012- 2016 Assets 1,567 4,886 24,228 Liabilities (1,227) (5,250) 30,877 Net Position 340 (275) (6,649)

Source: U.S. Bureau of Economic Analysis

Net Exports of Goods and Services (Billions of dollars) Net International Investment Position (Billions of dollars)

Source: U.S. Bureau of Economic Analysis

Financial Flows are 10 Fold Export Activity

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Exchange Rates Move with Fear

Brazil: 2017 Brexit: 2017

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2015 2016 2017 2018 2019 2020

Fed Funds Rates

Midpoint of target range

Source: Federal Reserve Board of Governors

Longer Run

How will the Fed Normalize Rates?

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Interest Rate Movements Drive Financial Flows

  • 1.00

0.00 1.00 2.00 3.00 4.00 5.00 6.00

Yields on 10-Year Bonds

Germany Great Britian Japan US

Percent

Source: Board of Governors Federal Reserve System

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The Next Step in Normalization: Shrinking the Balance Sheet

500 1000 1500 2000 2500 3000 3500 4000 4500 5000 Fed Agency Debt MBS Liquidity to Key Credit Markets Lending to Financial Institutions Long-Term Treasuries Traditional Security Holdings

Billions of dollars

Federal Reserve Balance Sheet: Assets

Source: Federal Reserve Bank of Cleveland

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Shrinking Treasury Holdings and Mortgage-backed Securities

  • For payments of principal that the Federal

Reserve receives from maturing Treasury securities, the Committee anticipates that the cap will be $6 billion per month initially and will increase in steps of $6 billion at three-month intervals over 12 months until it reaches $30 billion per month.

  • For payments of principal that the Federal

Reserve receives from its holdings of agency debt and mortgage-backed securities, the Committee anticipates that the cap will be $4 billion per month initially and will increase in steps of $4 billion at three-month intervals over 12 months until it reaches $20 billion per month.

10 20 30 40 50 60 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Cap on Principal Payments

Treasuries Agency Debt and MBS Billions of dollars Months from Start

Source: Federal Reserve Board of Governors

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Is Farmland a Stock or a Bond?

10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 80 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Earnings Multiples on 10-Year Treasury, Iowa Farmland, and U.S. Stocks

Iowa Farmland P/E Ratio Stocks P/E Ratio Inverse of the 10-Year Treasury

Farmland Multiplies Greater than Stocks and Bonds Farmland Multiplies Between Stocks and Bonds

Calculations based on data from CARD, Iowa State University and FRED, Federal Reserve Bank of St. Louis.

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Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

What Will Drive Farmland Values?

Farm Profitability Interest Rates Non-farm Influences

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Home Prices have Reached 2005 Peaks

One source of regional variation in land values.

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Market Dynamics

  • Who is going to buy?

– Farmers – Investors – Others?

  • Who is going to sell?

– Farmers – Heirs – Investors

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Who is at Risk – Small Farms?

Size of Farm (Acres) 550 1200 2500 Percent with Positive Cash Position 24.3% 83.8% 98.4% Working Capital to Value of Farm Production (% > 35%) 43.1% 96.1% 99.9% Term Debt Coverage Ratio (% > 1.1) 23.2% 76.1% 97.9%

Source: Boehlje and Langemeier, “Financial Vulnerability in the Current Downturn: Stress Test of Midwestern Corn-Soybean Farms, Purdue Agricultural Economics Report, June 2017, Table 1 https://ag.purdue.edu/agecon/Pages/Purdue-Agricultural-Economics-Report.aspx

Smaller farming operations have more challenges with

  • positive cash flow
  • working capital and
  • debt coverage.

Farms with 50% Land Owned and 25% Debt-to-Asset Ratio

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Who is at Risk – Rented Farms?

% of Land Owned 15% 50% 85% Percent with Positive Cash Position 0.3% 24.3% 74.8% Working Capital to Value of Farm Production (% > 35%) 0.5% 57.9% 90.8% Term Debt Coverage Ratio (% > 1.1) 0.5% 23.2% 83.8%

Source: Boehlje and Langemeier, “Financial Vulnerability in the Current Downturn: Stress Test of Midwestern Corn-Soybean Farms, Purdue Agricultural Economics Report, June 2017, Table 1 https://ag.purdue.edu/agecon/Pages/Purdue-Agricultural-Economics-Report.aspx

Farming operations with more rented land have more challenges with

  • positive cash flow
  • working capital and
  • debt coverage.

Farms with 550 Acres and 25% Debt-to-Asset Ratio

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Who is at Risk – Indebted Farms?

Debt-to-Asset Ratio 25% 50% Percent with Positive Cash Position 98.4% 53.7% Working Capital to Value of Farm Production (% > 35%) 99.9% 54.4% Term Debt Coverage Ratio (% > 1.1) 97.9% 61.8%

Source: Boehlje and Langemeier, “Financial Vulnerability in the Current Downturn: Stress Test of Midwestern Corn-Soybean Farms, Purdue Agricultural Economics Report, June 2017, Table 1 https://ag.purdue.edu/agecon/Pages/Purdue-Agricultural-Economics-Report.aspx

Farming operations with more debt have more challenges with

  • positive cash flow
  • working capital and
  • debt coverage.

Farms with 2500 Acres and 50% of Land Owned

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How Far Will Land Values Fall?

Indiana Farmland Values for Average Quality Land

1000 2000 3000 4000 5000 6000 7000 8000 9000 1000 2000 3000 4000 5000 6000 7000 8000 9000

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Dollars per acre (2016=100)

Source: Hurt, Chris, Department of Agricultural Economics, Purdue University.

60% decline in real value 25% decline in real value

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What Does it Take to Trigger a 1980s Scenario?

10 12 14 16 18 20 22 24 26 28 30 10 12 14 16 18 20 22 24 26 28 30 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Debt-to-Equity Debt-to-Asset

Source: USDA

U.S. Farm Debt Ratios

Ratio (Percent)

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Rising Debt Levels and Steep Land Value Declines

Note Calculations based on USDA data from 2016

U.S. Farm Debt to Asset Ratios Under Alternative Scenarios Change in Farm Debt

+10% +15% +20% +25% +30%

  • 10%

15.8 16.5 17.3 18.0 18.7

  • 20%

17.4 18.2 19.0 19.8 20.6

  • 30%

19.4 20.2 21.1 22.0 22.9

  • 40%

21.8 22.8 23.8 24.8 25.7

  • 50%

24.9 26.1 27.2 28.3 29.5

Change in Farm Real Estate Assets

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Conclusions

  • Today: A Cash Crunch in U.S. Agriculture
  • Tomorrow: Will Bankruptcies Emerge?
  • Land values are expected to soften through 2019
  • Slow and Steady Wins the Race.
  • The Watch List: Interest Rates and Exchange Rates