All Sweat, No Equity – How stable land prices would have crushed the family farm

“Buy land, they’re not making it anymore” – Mark Twain

For those of us that remember the first quarter of land we ever bought, we know that it was almost a religious experience. The one thing I can never take away from agriculture is the pride in accomplishment of owning a piece of dirt. Even today, after being ten years removed from the farm, that is the only thing that sometimes bothers me. For me it wasn’t even that first crop that I remember, it was my name on the rural municipality map that still sits in my desk drawer.

With all that has happened in agriculture over the last few years, it is easy to look at land appreciation as the cause of a lot of issues. The lack of affordability, the mass consolidation, the outside investment. Why couldn’t we blame everything on the large wealth accumulation by the baby boomer generation? We already do it in the housing market, why should land be different?

So, let’s play. Let’s think about it as a butterfly effect – a chaos theory that small, seemingly insignificant changes of a system can lead to vastly different and unpredictable outcomes. Let’s say that after I signed my life away to buy my first plot of land, the market never moved again.

A Shift in Wealth Structure

Welcome to a time when operations outranked equity. The balance sheet is now a stable scorecard, and the income statement dictates success. First off, the true operational profitability of the industry would be exposed. Over the last decade almost the entire wealth accumulation in agriculture has been real estate driven. Now the success of the farm would be based on operational efficiency, grain and livestock margins, and yield optimization rather than a ballooning asset class. I can say one thing, farms wouldn’t have “iron disease” in this scenario, it wouldn’t be feasible.

Let’s also not forget about the safety net that equity has provided in agriculture. Rapidly rising land values have absorbed a significant number of operational losses in the last two decades. Poor crop years, rising crop inputs, inflationary equipment increases all would have dire effects. Management mistakes would be immediately penalized by the bottom line in this new world. And forget about living off grandpa’s equity, there is none.

Lastly, I think we could also run back the technology, infrastructure, and research and development into agriculture. Capital investment would slow to a crawl without wealth in agriculture, which would then slow the industry down as a whole. Forget about autonomous equipment and new financing alternatives, we would be lucky to have a light bar to follow a straight line. Bring back the foam markers on the sprayers.

Accelerated Elimination of Small Farms

While many will argue that stable land prices would make it easier for new entrants or smaller operations, the resulting lack of borrowable equity would create a severe liquidity crisis. In layman’s terms, this would accelerate the demise, not protect against it.

Many farms today use land to secure operating credit. The borrowing capacity of the farm would be severely limited without the land appreciation that has been created over the last decade. Additionally, any volatility in cost of production would be dire without that additional room to increase lines or rely on cash reserves of a farm (which most don’t have). The other aspect that is forgotten is the safety net that land equity has provided for many operations. The ability to restructure and re-amortize land has been the plan B of many operations since I began farming in the early turn of the century.

Lastly, as I have alluded to in other articles, this would speed up consolidation, not slow it down. The larger operations with higher cash earnings and reserves would aggressively purchase distressed working capital operations. Instead of outbidding operations, the lack of ability to even purchase would be the downfall of the family farm.

All the Sweat

In the year 2004 I was told to go to university as there was no money in farming. Although I resented my father at the time, he was correct. If the land market had remained flat my story would be that of most of the next generation. The current wealth accumulation in agriculture and its ability to fund expansion, capital investment, and personal living have been the key drivers back to the family farm. A new generation based on work-life balance would not have come back for 80-hour weeks, high-risk stress, and a job not a business.

The other key driver would be that those farm kids that had specialized skills would find the appeal of non-producer jobs alluring. A stable salary, corporate benefits, and the resources to use their expertise would have kept them away from the severe financial liability and risk. Today’s farms have invested in human resources to maintain competitiveness against other sectors. Without equity and liquidity, this would not have happened.

Lastly, get used to being a tenant. Without the additional equity from the land for young farmers to use in expansion, you would be locked in permanent tenancy. The interesting part is that we currently blame investors for driving up land values even though they own less than 2% of total Canadian farmland. What happens if land remains stable with low appreciation, but they could earn a 4% dividend annually which is no longer possible at the current values. Investment and consolidation speed up, not slow down.

I can guarantee that land will one day slow down on appreciation (I did not say drop), but for it to provide the above reality it would have to drop about 90%. For some they will believe the opposite of the above discussion, others will agree adamantly. That is what makes this industry fun, nobody will ever be right.

The only cautionary tale I leave you with is “be careful what you wish for, lest it come true”. And in this case, that could be the demise of farms as we see them today.