Three emerging macro trends have recently started to converge, which may provide you a unique opportunity to materially improve the financial position of your farm or ranch, if you act quickly. Any one of these trends is important in its own right, but the combination of the three long-term secular shifts magnifies the aggregate power to potentially seismic levels.
The global pandemic has shaken public health, political, social, fiscal, and monetary foundations deeply, and the resulting tsunami waves of financial implications have only begun to demonstrate their long-term power. While it is generally a sucker’s game to predict markets, as predictions are often wrong not just in magnitude but even in direction, big secular trends are more visible to those willing to look at the big picture. Rather than trying to outguess the markets with short-term trading predictions, clearly evaluating these macro secular trends provides long-term investment opportunities with material wealth-building implications. When government programs roll out “stimulus” in multiple TRILLION dollar chunks, they may accomplish their intended immediate objectives (we will let the politicians sort that out), but the secondary effects as those waves of cash roll through the economy and settle into a dynamic marketplace will undoubtedly have larger and more long-term consequences. Identifying the effects of these waves can offer substantial opportunities to build long-term wealth.
As the Federal Reserve has attempted to stimulate economic activity by increasing the supply of money in the economy, interest rates have fallen to levels not seen in several generations. For the farm or ranch owner, these remarkably low rates come at a time when payment terms for farm mortgages are attractively flexible, making the refinancing of farm mortgages a great opportunity for virtually all owners of farmland. Whether an existing mortgage is close to its maturity date, or there are still several years remaining, it is important to act now to take advantage of the lower rates and longer maturities currently available. The sooner you can lock in these rates and terms, the sooner you can benefit from the improved cash flow from the lower payments.
The three waves can be summarized as follows:
1. Reversal of a 40-year downward trend in interest rates: The secular trend in long-term interest rates in the US has been progressively downward since 1980. This culminated in a 5-year treasury yield as low as 0.19% last year. As the supply of money has been pumped to unprecedented levels by fiscal policy, reinforced by accommodative monetary policy, in a pandemic environment that constrained money demand, the ultra-low-rate environment persisted near the zero rate boundary. With the aggressive roll out of vaccines driving a rebound of consumer demand and spending, and a Federal Reserve that at some point will reduce their active purchases of government debt as they unwind their ballooned balance sheet, it is likely we are at the beginning of the next secular trend of rising long-term rates. Indeed, the 5-year Treasury rate is now around 0.80%, still historically low, but well above rates of last fall.
2. Farm product prices have been rising: According to the Kansas City Federal Reserve, average prices for corn, soybeans, and wheat reached 6-year highs in December 2020. While various political factors may drive short-term fluctuations, the large amounts of fiscal and monetary stimulus will continue to power commodity price increases over the next several years.
3. Farmland prices have not yet incorporated rising income expectations: According to the Federal Reserve Bank of Chicago, farmland valuation levels in the Central Midwest peaked in 2013, and an increase in real (inflation adjusted) values during 2020 was the first increase since then. As of the end of 2020, Midwest farmland values have been flat for nearly a decade and are down 9% from 2013 levels, after inflation is factored in. As the wave of newly printed money works its way through the economy, and product prices (including ag commodity prices) rise, it will power a strong long-term increase in farmland prices.
For those of you that are in a position to acquire additional farmland, the current environment offers a nearly unprecedented opportunity to buy land before prices move materially higher, before borrowing rates move materially higher, and while income levels are high enough to support the additional debt load. While we acknowledge the risk of being hyperbolic in our perspective, we believe we are in the early stages of a substantial and long-term trend of improving farmland prices that offer tremendous investing opportunity for those willing to look past short-term noise. We encourage you to seriously consider not only refinancing any mortgage debt you may currently have on your farm- or ranchland, but also to aggressively pursue additional opportunities to expand your land holdings.
A good lender should be able to listen intently to your objectives and help you select the loan terms that best permit you to take advantage of today’s exceptional rates and structural alternatives. While many banks may not be able to offer the full range of long-term fixed rates currently available, McHenry Savings Bank, through its relationships with FarmerMac and other leading farm lenders, can provide a full menu of attractive financing alternatives. Please feel free to contact me to discuss your situation or address any questions you may have.
Tim Kempel | SVP, Director of Agribusiness Lending
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