High land prices, low interest rates lure younger farmers

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Posted: Thursday, February 21, 2013 12:00 am

FRIEND, Neb. — Returning to the family farm a mile northeast of here was always Scott Spohn's hope.

But feeling unsure about that future, Spohn went to the University of Nebraska-Lincoln after high school, graduated with degrees in agribusiness and agronomy and later accepted a position as a commodities trader.

“I really enjoyed it. I liked the company. But their corporate office is in Illinois,” he said. “I wanted to stay close to Lincoln.”

So five years ago, he quit his job and headed home. Spohn, now 33, is one of the growing number of young people returning to the family farm. Strong demand for commodities and historically low interest rates are supporting record high net farm income, making farming attractive again to young producers. These same factors also are driving farmland prices, which set record highs last year.

And after nearly 20 years of downturn, the re-emergence of a younger generation of farmers is helping to fuel demand for farmland. While today's buyers are seldom young farmers, they're often older farmers who are expanding their already large operations to accommodate a younger family member returning to join the family farm.

Paying high prices for land is worth it for farmers when they expect the income to be good and the investment to pay off. And now, low interest rates are making it more doable. About three-fourths of the farmland sold last year was purchased by farmers, rather than investors, and the sales records were set despite last year's drought.

“(The drought) hasn't really grabbed the economic picture to the extent that people are saying, 'This isn't working,' ” said University of Nebraska agricultural economist Bruce Johnson.

In fact, Johnson said he's noticed an uptick for several years in young people saying they want to return to the farm. In a survey of his rural community economics class each semester, he inquires about students' future plans. Ten or 20 years ago, he said, the minority of a 50-student class would respond “go home and farm.” Now, a strong majority says that's the plan.

“Many of the students down here do have that opportunity. It's one that looks pretty favorable,” Johnson said.

He noted the value of Nebraska's agricultural annual production has increased about 80 percent in just five years and the state's annual net farm income has more than doubled.

In his 40 years of studying agriculture land markets, Johnson knows that farming wasn't always an option.

The 1970s boom led to the 1980s bust, which led to more than a decade of farm kids wary of returning to the fields. In 1982, farmers younger than 35 represented about 16 percent of all agricultural operators and by 2007, they made up about 5 percent, according to data from the Census of Agriculture.

The more recent agriculture census, from 2012, isn't out until later this year, but Johnson said that wouldn't tell the whole story because the census counts everything from mega farm operations to 4-H projects. Anyone who generates a thousand dollars of revenue in a year is considered a farmer.

“The overall numbers tell us very little,” he said. But anecdotal evidence does.

Johnson said there's an uptick of multiple-family and multiple-generation farms across the state. Sons and daughters are returning to help their parents, or aunts and uncles or grandmothers and grandfathers. They're drawn to the strides the industry has made, like more high-tech equipment and less manual labor.

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Without the opportunity to partner with his parents, Spohn said he couldn't have gotten started. Spohn, who's also part of Omaha-based Farm Credit Services of America's young and beginning farmers program, needed the familial — and financial — connection to make it work.

“If you don't know someone, you can't expect to just say 'I'm going to be a farmer,'” Spohn said. “It's going to be extremely difficult because of the overhead and the assets you have to buy to start out.”

While the industry for now is strong, the question is how long the current farm boom is expected to last.

Nebraska farm income during 2013 is estimated at about $4.5 billion, according to a forecast this month from the Nebraska Business Forecast Council, but drought conditions have made that forecast more uncertain than normal, Johnson said. He believes this year's farm income will be considerably lower than in recent years.

Nationally, the USDA forecasts net farm income at $128.2 billion in 2013, up nearly 14 percent from $112.8 billion in 2012. After inflation adjustments, 2013's net farm income is expected to be the highest since 1973 — but the forecast could change depending on drought conditions.

Creighton University economist Ernie Goss, who each month surveys Midwest bankers to track rural economic growth, said a kind of perfect storm has brewed for farmers and he has a positive outlook for the next few years. He said farmers today are better positioned financially to weather a decline than during the farming crisis of the 1980s.

The majority of bankers reported in his survey last month that the drought has had little to no impact and, to Goss' surprise, farmland prices, cash rents and farm equipment sales were actually experiencing strong growth due to the Federal Reserve's efforts to keep interest rates low.

“You're not going to see the growth in 2013 you saw in 2012, but according to our surveys and looking ahead to 2013, you're going to see pretty good farmland prices,” he said.

At rates below 5 percent, long-term interest rates are as low as those offered post-World War II when the country was in a recession, said Bill Davis, chief credit officer with Farm Credit Services of America. As a result, bidders are driving land price increases to some of the most dramatic levels seen in the last 50 years.

“The prices farmland is bringing clearly reflect the buyers' view that returns over variable costs will stay high and interest rates will stay low,” Davis said. The land purchased generally is being used for crops instead of for livestock because crop farming is more profitable right now.

New real estate loans for Farm Credit Services of America were a record $3.1 billion in 2012. By comparison, new loans for real estate purchases for the Omaha-based financial cooperative were $1.9 billion in 2011, $1.7 billion in 2010 and $1.3 billion in 2009.

Last year, top quality Iowa farmland sold at more than $12,500 per acre, and high-quality irrigated land in Nebraska went for even higher prices. Nebraska showed the highest percentage gain of any state as values rose 33 percent between mid-2011 and mid-2012, according to the USDA land value series.

Jim Farrell, president and CEO of Farmers National, the nation's largest farm and ranch management company, said land sales picked up in midsummer, but $360 million in real estate sales in the last quarter is what drove 2012 to break records. Anticipated increases in capital gains tax rates pushed farmers who were thinking about selling land to do so before the end of the year.

Davis anticipates long-term demand for commodities will continue, but he also believes that world supply and demand eventually will balance, reducing grain prices and net farm income. In addition, interest rates are likely to rise in the next three to five years, he said.

The ripple effect is that farmers will be less profitable and that will affect how much they're willing to pay for land. Davis says farmers generally are well-positioned for that time.

“Most of the farmland value increases we've seen over the past seven years appear to be supported by long-term domestic and world demand for agricultural commodities,” Davis said. “Most buyers are farmers and they generally are in a very strong financial position. They have made these purchases with relatively modest financial leverage.”

The effects of a strong agricultural economy in Nebraska and Iowa have trickled into pocketbooks of those based in the metro, both directly to those who own farmland and cash rent it and also indirectly through farmers who spend money at Omaha businesses, like agricultural manufacturers that make equipment. Agriculture, Goss said, anchored many states during the recession.

“There's a reason why Omaha has stood up much better than, say, other cities that are like-sized,” he said.

Spohn says he's aware these boom times won't last and, with prices at historic highs, he's choosy about buying more acres for the operation he runs with his father that employs three full-time workers. He's added a couple quarter sections of land since getting back in the business, but for now, he's spending the winter months making other investments, such as replacing and repairing equipment.

At current land prices, he said, “I'm not quite as interested unless it's the right piece and fits us well.”

Contact the writer: 402-444-1192, emily.nohr@owh.com

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