ITA Quarterly Newsletter • February 2017

ITA President's Message

I look forward to serving the Iowa Trust Association as president in 2017. I would like to thank Todd Silliman for his leadership in 2016, as well as our entire board. Our emphasis this year will continue to be adding value to your membership by providing affordable education opportunities for you and your trust personnel. Education, communication and service are the keys to success in our business. Whenever you have an idea or recommendation you feel my be beneficial to our association, please share that with Darcy Burnett or any ITA board member.

As I write this on January 3, we often resolve to do a better job at something at the start of a new year. One suggestion I have for you is something rather simple, but has been helpful for me, a “Memo to File.” For every investment decision, conversation with a current or prospective customer, discussion during an investment committee meeting relating to an account, etc., I follow that with a file memo. I cannot begin to tell you the number of times this has service me well as I look back to understand why or when I did something with an account. Yes, it takes a few more minutes each day, but it certainly saves time in the future. And, as you do it more and the value of doing it comes clearer, the better your file memos will become!

Good luck with your 2017 resolutions and thank you for your Iowa Trust Association membership. Call me at 515-462-4242 or 515-486-8034 or email me if I can be of service.

Jim Mease
Vice President & Trust Officer, Farmers & Merchants State Bank, Winterset


Why Do Cash Rent Landlords Need to Know Yields?

Farmland Stewardship Solutions, Des Moines
 
“It’s none of their business”, “They are getting cash rent that is guaranteed and not affected by yields”, “It’s the operator’s data”, everyone has heard this before, but is it right? In some ways this is correct since that is the way leasing was done in the past.  Most owners didn’t care or feel they didn’t need this information, but in the information age this is changing and for good reasons.
  1. The information is readily available. Most, if not all growers have federal crop insurance, which lists the last ten years of crop production. Many operators now have yield monitors that not only show the yields but the variations in fields in an individual year and more importantly over time.  This allows for the best areas and trouble spots to be identified and improved upon.
  2. Yield translates to value in farm income and flows through to rental rates that an operator can afford and landowner deserves.
  3. Yields and yield monitor data can and should be used for the operator and owner to work together to make the farm as productive as possible. If the yields are lower than they should be on a consistent basis then this needs to be figured out. If a landowner has a farm with lower yields related to factors they don’t want to correct then this should be pointed out and addressed by the tenant. If a new tenant is taking over a farm with low fertility, compaction or less than ideal drainage then this type of data can provide the reasoning for improvements to be made and the rents to be lower, until the issues is resolved. Without information many landowners think the operator is just a complainer and probably not telling the truth about yields.
  4. Yields are an indication on the soil health and quality of the land. This cannot be judged by the soil surveys (CSR in Iowa) since these soil ratings assume adequate drainage and fertility. If you lined up 10 sons of Secretariat and had to choose the fastest horse you have a 10% chance of being right but if you had data on their past races then you know who is performing the best and who isn’t. It is similar with land. Just because farms have similar soils they may vary 25-40% in yield depending on a number of factors.
  5. Flexible cash rent leases and crop share leases are directly affected by yields so monitoring this important factor is a must.

Some people will say that yield is not everything, but in the Midwest corn and soybean fields it is what we sell and more is better than less.  Long term well managed leases depend on agronomic factors being optimized which leads to the best yield possible. The tools are available to educate cash rent landowners so they can work with and be proud of their tenants. There are some owners who are only interested in the highest cash rent and these folks will not change but if presented with good information you may be able to keep it reasonable. A mediator and data analyst like Farmland Stewardship Solutions may be what everyone needs.


Interest Rate Change: How will it affect farmland values?

Travis Smock, Peoples Company

We have finally reached a point that we all knew had been coming for what seemed like forever, interest rates are on the rise. The U.S. Federal Reserve increased the federal fund rate by 25-basis points to 0.75% last month. Aside from another 25-basis point raise in December 2015, this was the only change after nearly a decade at a constant 0.25%. With the Fed predicting the rate to reach 1.4% by the end of 2017, it leaves many of us in the farmland industry questioning how the change will affect values moving forward.

At first glance, it appears that a value decline is inevitable with the cost of borrowing money on the rise creating a decrease in buying power. If a land buyer were to purchase a farm for $8,000 per acre and borrow 60% at a 4.5% interest rate over 20 years, their total cost of principal and interest per acre would be $369. If the interest rate increased one percent to 5.5% and the buyer wanted to keep their per acre payment the same, they would only be able to pay $7,350 for that same acre of farmland. This scenario shows an 8.1% drop in land values from a one percent interest rate change. Stepping back and looking at the whole market, records show that a high percentage of Iowa farmland is owned with little or no debt making this scenario less significant than one may think.

The next land value threat would be that higher interest rates will cause farm buyers to demand a higher capitalization rate on their investment due to a correlation between the Fed interest rate and the 10-year treasury bond rate. Although there is traditionally some correlation between the two, many believe the market has anticipated a rate hike for some time. In addition, even as farmland sales prices have declined over the past few years, cap rates have remained relatively unchanged and are nearly one percent higher than the 10-year treasury rate during that same period.

A rise in interest rates will likely affect the buyer pool of individuals looking to own farmland, as well as how a purchase is structured. That being said, farmland has commonly been a long-term investment and although the average cap rate over the past 15 years has been 3.9%, the appreciation of the asset over the same time has averaged an annual increase of 9.9%. With this in mind, many land buyers are looking at the current market as an opportunity to buy a depreciated asset with upside return potential on the compressed land rents. Coupling these market trends with the multitude of factors that influence the Ag industry, a small interest rate change will plausibly have a minimal effect on the overall land values across the state.


Legislative Tool Helps you Connect with Legislators

The Iowa Bankers Association's Legislative Action Center allows bankers to easily contact legislators electronically. Letters on key pending legislation and regulations are posted on the site and can be easily edited and/or personalized for bankers to send to their respective elected officials and regulators at the state and federal level. The Legislative Action Center is available online at www.iowabankers.com.


Contribute to the Iowa Trust Association

As a reminder, the Iowa Trust Association (ITA) welcomes contributors to their quarterly newsletter. If you would like to comment on recent activities in the industry or let us know about an upcoming event that would be of interest to our readers, please feel free to contact Darcy Burnett, at (800) 800-2353 or dburnett@iowabankers.com. Thank you for your interest in our publication and we look forward to hearing from you!


ITA Newsletter Subscription

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