Catalysts For A Drop In Farmland Values

People are me why I think farmland values can drop 50%.

The short answer: I believe farmland values move in the same patterns as every other asset.

The more interesting answer involves the catalysts required, which I share in today’s video.

Here's a summary of the podcast:

Anticipated Farmland Value Correction: Trent predicts a significant correction in farmland values, potentially reaching 50% to 62% at some future point. This forecast is based on the belief that farmland, like other asset classes, adheres to historical market cycle patterns.

Market Cycle Theory: Asset values are subject to cyclical fluctuations, including periods of expansion and contraction (bull and bear markets, recessions, depressions). While the exact timing of these shifts is unpredictable, their occurrence is considered inevitable.

Prerequisites for a Decline: A downturn in farmland values is expected to be preceded by two crises:

• Liquidity Crisis: Characterized by tight margins, business losses, and inability to service debt due to insufficient cash flow.

• Balance Sheet Crisis: A more severe stage, occurring if a liquidity crisis is prolonged, leading to balance sheet erosion, financing cutoffs, and potential loan calls.

Seven Catalysts for Farmland Value Decline: A combination of the following factors, rather than all occurring simultaneously, is anticipated to drive a decline in farmland values:

1. Low Commodity Prices: Reduced grain and oilseed prices directly impact profitability and debt serviceability for agricultural businesses.

2. Rent-to-Loan Ratio Discrepancy: Current land rental rates are significantly lower than the cost of ownership for new purchases, suggesting a necessary adjustment where either rents rise or land values decline to realign this ratio.

3. Rising Interest Rates: Even modest increases in interest rates (e.g., 1-2%) can substantially reduce the affordable asset value for purchasers, impacting land demand and pricing.

4. Attractive Alternative Investments: In an environment of higher interest rates, other investment opportunities offering competitive returns become more appealing than farmland, especially if farmland's rental yields are low (e.g., 1-3% on new purchases).

5. Baby Boomer Wealth Transfer: The impending intergenerational transfer of wealth from aging landowners may lead to increased land supply as properties are released by non-farming heirs.

6. Government Policy Shifts (particularly U.S.): Potential changes to U.S. agricultural policies, such as the ethanol mandate (which currently utilizes a significant portion of U.S. corn production), could severely impact commodity prices and have a ripple effect on farmland values. Changes to Canadian crop crop insurance policies (e.g., a shift to private insurance) could also increase costs for farmers.

7. Global Population Decline: Long-term projections indicate a global peak population around 2077-2100, followed by a decline, which could eventually reduce global food demand.

Outlook: While these catalysts may not all materialize, the cyclical nature of markets suggests that a combination of these factors is likely to influence farmland values in the future.

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Trent Klarenbach

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Nothing written, expressed, or implied here should be considered investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own due diligence.