In addition to wondering how low land prices can go, economists, bankers and farmers have similar questions about crop prices.

In addition to wondering how low land prices can go, economists, bankers and farmers have similar questions about crop prices.

Brent Young, a regional ag and business management specialist for Colorado State University who recently presented an economic outlook in Burlington and Greeley, discussed work done on that topic by Paul Peterson, an ag and consumer economics specialist at the University of Illinois.

Peterson looked at the time it took for slumping corn prices to recover to their previous highs.

“His research showed that the average recovery time was nine years,” Young said. “The good news is it does appear the recovery time has shortened in more recent price cycles.”

Still, it usually takes an unforeseeable game-changing event — the kind that is few and far between — to trigger a new price spike. World War I and II each did it. The most recent price surge was brought about when the corn ethanol industry ramped up just as a historic drought hit the Corn Belt.

For now, land prices remain strong in many parts of Colorado, with declines of only 3 to 4 percent overall, Young estimated. Even so, land values in Colorado and Western Kansas aren’t immune to the effects of the commodity price cycle, he said.

“Typically there’s a lag time of two to three years of lower commodity prices before you see dramatic changes in land values,” he noted. “We tend to see the same thing with cash rents as we see with land prices.”

Rodney Jones, formerly with K-State and now an ag finance and management specialist at Oklahoma State University, also had concerns about the agricultural outlook.

He pointed out that net farm income dropped 36 percent in 2014 alone. By 2015, it is expected to be half of what it was just two years ago.

“That’s quite a shock to the system by anyone’s standards,” he said. The ratio of total debt held by the ag sector relative to net income is rising. That figure serves as an early warning indicator closely watched by the ag finance world, he said.

“It’s projected to be 6.3 to 1 in 2015,” he said. “We have to go back to the mid to late 1980s to find a 6 to 1 number, so that means we have to go back a long ways to see a number that’s as concerning as what we are seeing now. It proved to be one of the early warning signs of the 1980s. We are also noticing that short term operating loan volume is up considerably just in the last quarter. It’s up 24 percent from a year ago.”

Another disturbing figure is that, at today’s prices, it would take the average farmer nine years to pay for an acre of land with 30-bushel wheat. That’s the longest it’s been going back to the 1970s.

For now, at least the debt to equity ratio is better than it was during the farm crisis.

“Our debt to equity is at 15 percent now compared to 20 percent in late 1970s. It peaked at 28.5 in 1985,” Jones noted.

Low interest rates help

One saving grace compared to the 1980s is much lower interest rates, pointed out Allen Schulte, a farmer from Stratton who attended Young’s recent economic outlook presentation in Burlington.

Even if the Federal Reserve Board moves toward normalizing interest rates in December, the governing board has said any increases would be slow and gradual.

Still, ag economists recommend locking in as much debt at long-term fixed rates as possible to avoid upside risk.

It’s the uncertainty surrounding commodity prices and dramatic declines in profitability that has farmers most worried, Schulte said.

“Usually cattle and crops aren’t both going down at the same time,” he said. Schulte’s been farming for many years but he said for farmers who are just getting into the business or who have expanded aggressively in recent years, a crisis might be brewing.

“You’re dealing with much bigger numbers. Just look at land prices,” he said.

Cash rents have reached record levels in tandem with farm prices. In the Midwest, some farmers made headlines this fall by throwing up their hands and walking away from their existing rental agreements.

That hasn’t happened much yet in the Central Plains. But Young said he is getting a lot of calls from farmers trying to determine where rental rates should be. He is encouraging farmers to renegotiate if they can.

“Current cash rents just won’t pencil out. Be very cautious about continuing to rent land that you know you’ll be operating at a loss,” he said.

Farmers should also carefully examine what they spend on machinery and other assets. Jones said many farmers have already started to delay replacement purchases.

He also cautioned that the regulatory environment has changed since the last major downturn. “Lenders may not have the flexibility they had back in the 1980s,” he said.

That trend could be offset somewhat by what he called the “uberization of finance,” or the rise of alternative financing models.

“Out of all the pieces of land my wife and I have bought, half of those have been seller financed,” said Jones, who farms in Oklahoma and Kansas. “I would have no problem calling the seller and negotiating on our payment arrangements. I also know my students would think nothing of working out a financing deal online. I don’t know how much of that will come to fruition in the future, but we certainly could see more of it.”

Federal farm support has changed as well, with farm programs shifting away from support payments to crop insurance products. However, a downtrend in prices erodes yield guarantees over time, Jones said.

For those reasons, farmers might want to consider buying up higher levels of coverage, he noted.

Young agreed, adding that farmers should take a careful look at the Risk Management Agency’s new whole farm revenue protection product.

“It includes livestock for the first time, and it’s geared toward diversified farms with at least three different enterprises,” he said. “You could be eligible for up to an 80 percent premium subsidy. The fact that it’s based on revenue rather than price makes it look really good.”

Farmers might also want to adopt a strategy of minimizing losses rather than maximizing returns, added Young, who had just finished harvesting corn the previous night on his farm near Sterling.

“Farmers might want to put a certain percentage of their land in a low-cost conservation crop to maintain soil fertility and control weeds rather than raise a high input crop,” he said.

Regional ag economists in Colorado are planning to host a series of outlook and strategy sessions in early 2016 across Eastern Colorado to update producers on the latest economic picture and share ideas for how to manage for an extended period of low commodity prices, Young said.