Farm Economy Softens Further

Residing in the midwest we always keep our eyes on the farm economy–it really is the lifeblood of many states.

Additionally we have watched newer farm land REIT Farmland Partners (ticker:FPI) closely. We have had a real problem with the way this REIT is set up and with what we perceive to be sketchy financials as well as less then forthright management.  FPI releases their earnings tomorrow night so there should be some interesting reading, but we don’t expect they will hold much real meaning–too many transactions during the quarter and year with one time charges etc.

It is our observation that FPI pays premium prices for the land and receives back in return sweetheart contracts from the prior owner, who now becomes the tenant. The rents claimed are just too high to be believable and are not sustainable. We believe that farm land is a good investment over the next 20-30 years, but there can be long periods of time where values of land drop dramatically. We wrote about this in a bit more detail in December.

Now comes the news that tenants are beginning to walk away from contracts for renting land.  This had to happen. Nobody is going to pay $300-400/acre for land with cash corn prices at $3.25-$3.50 yesterday. This is a huge loser for someone renting land.

To read the story on walkaways it is here. Wedon’t expect this to be a massive issue this year—but if prices remain low for the next 12 months we would expect that a crisis will be upon the farm economy and walkaways will almost become the norm.