Focus Management Group

Do Corn Prices Change the Landscape For Leveraged Land?

By: Juanita Schwartzkopf – Managing Director

 

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Agricultural land values, especially in the Corn Belt, have risen significantly over the past five years. The chart below shows the increase in value of an acre of land from 2008 to 2012.   From 2011 to 2012 the Corn Belt experienced an overall 18.3% increase in land values, from $3,700 per acre to $5,560 per acre.  Iowa led the way with a 22.8% increase in value, from $3,950 per acre to $7,000 per acre.

The USDA National Agricultural Statistics Service compiles and summarizes agricultural land values in it annual reports.  The data above is from the “Land Values 2012 Summary (August 2012), USDA, National Agricultural Statistics Service”.

This increase in value was not unique to the Corn Belt.  The overall US agricultural land values increased from $2,170 per acre in 2008 to $2,650 per acre in 2012, or 22%.

A key driver of this increase in land values was the increased price of corn, and other commodities.  The table below shows the price per bushel of corn from 2008 to 2012, and through futures trading into 2014.  The price of corn as of December 31, 2007 was $3.77 per bushel and increased to $6.87 per bushel as of December 31, 2012 (an 82% increase).

The USDA National Agricultural Statistics Service compiles and summarizes agricultural land values in it annual reports.  The data above is from the “Land Values 2012 Summary (August 2012), USDA, National Agricultural Statistics Service”.

This increase in value was not unique to the Corn Belt.  The overall US agricultural land values increased from $2,170 per acre in 2008 to $2,650 per acre in 2012, or 22%.

A key driver of this increase in land values was the increased price of corn, and other commodities.  The table below shows the price per bushel of corn from 2008 to 2012, and through futures trading into 2014.  The price of corn as of December 31, 2007 was $3.77 per bushel and increased to $6.87 per bushel as of December 31, 2012 (an 82% increase).

Impact of Leverage

Using a range of corn prices from $5.50 per bushel to $7.50 per bushel, estimated annual input costs of $400 per acre, and a land cost of $5,000 per acre, cash flow depends on the leverage position of the land holder.  At $5.50 per bushel, a land owner with 80% leverage would be unable to pay debt as agreed.  That same land owner at 50% leverage would continue to service the debt.

 

This simple example shows the impact of the recent drop in corn prices on the ability to repay debt.  Crop farmers who were able to easily service debt at $7.50 per bushel are now unable to service debt at $5.50 per bushel.

How does this impact the lender?

If the lender is financing farming operations, it will be critical to forecast the lower income level for this planting cycle.  Advance rates and inventory values may need to be adjusted.

If the lender has supplied term debt, it will be important to perform stress tests on the portfolio to isolate which farming operations may experience cash flow problems as a result of this price change.

By preparing a few simple analyses, the lender will be able to determine:

  •  which borrowers may have difficulty meeting debt obligations as agreed, and
  • which borrowers require adjustments to their working capital lending arrangement.

When undertaking this review, the farmer’s hedging practices should also be reviewed.  Given the changes in market prices, farmers may be altering their hedging strategies.  In some cases, farmers who have not used hedging may be reacting to corn price decreases by locking in the lower prices, and therefore locking in the potential losses.  Alternately, farmers who have used hedging may not be using hedging this year because they do not want to lock in losses.

Focus Management Group has worked with borrowers and lenders in the crop farming and grain elevator industries.  Focus Management Group is a leading business restructuring firm headquartered in Tampa, with offices in Atlanta, Chicago, Cleveland, Dallas, and Los Angeles. For more information on our experience with successful turnarounds or restructuring in the Agricultural Industry please contact us.

 

 

 

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