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

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

Farmland Values Surged in the Recent Boom Real Indiana Farmland Values Dollars per acre (2016=100) 10,000 10,000 9,000 9,000 8,000 8,000 8.0% per year 7,000 7,000 6,000 6,000 8.5% 4.1% 5,000 5,000 per year per year 4,000 4,000 4.6% per year 3,000 3,000 3.4 per year 2,000 2,000 4.3% 1,000 1,000 per year 0 0 1975 1985 1995 2005 2015 Top Quality Average Source: Purdue University Note: Farmland values adjust with CPI Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Nominal Gains are 2 to 3% Higher than Inflation-Adjusted (Real) Gains Indiana Farmland Values Dollars per acre 10,000 10,000 9,000 9,000 8,000 8,000 10.0% 7,000 7,000 per year 6,000 6,000 9.4% 5,000 5,000 per year 6.3% 4,000 4,000 per year 3,000 3,000 7.7% per year 7.0 2,000 2,000 per year 1,000 1,000 8.1% per year 0 0 1975 1985 1995 2005 2015 Top Quality Average Source: Purdue University 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/ Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

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

Because land values are going higher. • • In 5 years, more farmers expect Over the next year, more farmers expect higher farmland values lower farmland prices. Source: Ag Economy Barometer, Purdue Center for Commercial Agriculture and CME, https://ag.purdue.edu/commercialag/ageconomybarometer/ Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

What Will Drive Farmland Values? Non-farm Farm Interest Influences Profitability Rates Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Farm Profits are Expected to Stabilize U.S. Returns to Corn Production Above Variable or Operating Costs Dollars per acre 600 600 500 500 400 400 $275 to $300 per acre 300 300 200 200 2017 Projections 100 100 2016 Projections 0 0 2000 2005 2010 2015 2020 2025 Source: Economic Research Service, USDA Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Global Inventories are Rebalancing U.S. Stocks to Use Ratios Stock as a percent of Use 50 50 USDA 40 40 Forecast 30 30 20 20 10 10 0 0 Corn Soybeans Source: USDA Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

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

What Will Drive Farmland Values? Farm Interest Profitability Rates Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Financial Flows are More Dominant than Ever U.S. Net International Investment Position (Asset Minus Liabilities) Billions of 2016 Dollars 2000 0 -2000 -4000 -6000 Assets: US purchases -8000 Liabilities: Foreign purchases -10000 1976 1981 1986 1991 1996 2001 2006 2011 2016 Source: U.S. Bureau of Economic Analysis Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Financial Flows are More Dominant than Ever Net Exports of Goods and Services Net International Investment Position (Billions of dollars) (Billions of dollars) 1976- 1990- 2012- 1976 - 1990- 2012- 1980 1994 2016 1980 1994 2016 Exports 315.3 730.8 2,072.4 Assets 1,567 4,886 24,228 Imports (367.2) (797.6) (2,548.2) Liabilities (1,227) (5,250) 30,877 Net (51.9) (66.8) (476.1) Net 340 (275) (6,649) Exports Position Source: U.S. Bureau of Economic Analysis Source: U.S. Bureau of Economic Analysis Financial Flows are 10 Fold Export Activity Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Exchange Rates Move with Fear Brexit: 2017 Brazil: 2017 Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

How will the Fed Normalize Rates? Fed Funds Rates Midpoint of target range 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2015 2016 2017 2018 Longer Run 2019 2020 Source: Federal Reserve Board of Governors Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Interest Rate Movements Drive Financial Flows Yields on 10-Year Bonds Percent 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 Germany Great Britian Japan US Source: Board of Governors Federal Reserve System Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

The Next Step in Normalization: Shrinking the Balance Sheet Federal Reserve Balance Sheet: Assets Billions of dollars 5000 4500 Fed Agency Debt MBS 4000 3500 Liquidity to Key Credit 3000 Markets 2500 Lending to Financial 2000 Institutions 1500 1000 Long-Term Treasuries 500 0 Traditional Security Holdings Source: Federal Reserve Bank of Cleveland Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Shrinking Treasury Holdings and Mortgage-backed Securities • For payments of principal that the Federal Cap on Principal Payments Reserve receives from maturing Treasury Billions of dollars securities , the Committee anticipates that 60 the cap will be $6 billion per month initially Treasuries and will increase in steps of $6 billion at 50 three-month intervals over 12 months until Agency Debt and it reaches $30 billion per month . 40 MBS 30 • For payments of principal that the Federal Reserve receives from its holdings of agency 20 debt and mortgage-backed securities , the Committee anticipates that the cap will be 10 $4 billion per month initially and will 0 increase in steps of $4 billion at three-month 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 intervals over 12 months until it reaches $20 Months from Start billion per month . Source: Federal Reserve Board of Governors Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Is Farmland a Stock or a Bond? Earnings Multiples on 10-Year Treasury, Iowa Farmland, and U.S. Stocks 80 80 Farmland Multiplies Between 70 70 Stocks and Bonds 60 60 50 50 Farmland Multiplies 40 40 Greater than Stocks and Bonds 30 30 20 20 10 10 0 0 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 Iowa Farmland P/E Ratio Stocks P/E Ratio Inverse of the 10-Year Treasury Calculations based on data from CARD, Iowa State University and FRED, Federal Reserve Bank of St. Louis. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

What Will Drive Farmland Values? Non-farm Farm Interest Influences Profitability Rates Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Home Prices have Reached 2005 Peaks One source of regional variation in land values. Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Market Dynamics • Who is going to buy? – Farmers – Investors – Others? • Who is going to sell? – Farmers – Heirs – Investors Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.

Who is at Risk – Small Farms? 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 Size of Farm (Acres) 550 1200 2500 Percent with Positive Cash Position 24.3% 83.8% 98.4% Working Capital to Value of Farm 43.1% 96.1% 99.9% Production (% > 35%) 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 Purdue University Cooperative Extension Service is an equal access/equal opportunity institution.