Risk Management Strategies for Farmland Owners
Nov 1, 2023
As with any asset, farmland ownership carries risk. While farmland is a good investment, especially compared to more volatile assets, that doesn’t mean it’s completely risk-free. As such, farmland owners need to employ risk management strategies to protect their financial future.
Here’s a quick rundown of the risks that farmland owners will face in the coming 12-18 months, and some actions you can take to mitigate those risks and secure your assets.
What risks do farmland owners face in 2023 and 2024?
A major advantage of farmland as an asset class is that it not only appreciates in value over time, but it can generate a positive cash flow through active farming.
While 2022 saw a spike in farm incomes, farm incomes in 2023 seem to be erasing those gains. Add to this trend rising input costs, it’s looking like farmers will face a tight squeeze this season and next.
If you and your farmer are in a crop share agreement, then you’ll feel these tightening conditions directly. However, if you’re in a cash rental agreement, that doesn’t mean you’re completely isolated—farmers who anticipate tighter margins in 2024 may seek to reduce their lease amounts.
So what can we expect in 2024? While it’s impossible to know for certain, here are some factors to take into consideration:
Corn and, to a less extent, soybeans seem to be trending downwards in price, back to pre-Covid levels—which means it’s not implausible to expect this trend to continue
USDA indicates that high input prices won’t ease, even into 2024
NOAA predicts mostly normal temperature or precipitation throughout much of the Midwest in the 2024 planting and growing seasons—which could improve crop yield compared to 2023
The 2023 Farm Bill is, as of now, still in flux, meaning there could be policy changes that impact farmers after its passage
What risks do farmland owners face in good times and bad?
In addition to the unique risks of the current moment, farmland owners are also subject to risks that can rear their heads at any time. These include:
Weather and climate patterns
Crop production yields
Commodity prices
Government policies (local, state, & federal)
Global market disruptions (e.g. Covid, Ukraine war)
Any and all of these factors can cause wide swings in farm income and, more importantly, net profitability. These can fall into five general categories of risk that farmland owners must consider when putting together their risk management strategies.
Production risk
Simply the process of producing crops or livestock exposes you to risk. Weather, disease, pests, and other factors all play into production yields. This impacts the profitability of your operation, which in turn impacts your farmland value.
Price or market risk
Farm profitability is a precarious balance between commodity and input prices. Because both prices vary significantly from crop to crop, planting decisions have a major impact on a farmer’s ability to manage risk. Price factors also determine a farmer’s decision to diversify and scale the operation.
Financial risk
Farm financial cycles are inherently risky. Borrowing money and repaying debts—plus uncertainty about the farm’s financial prospects—is the source of many farmers’ sleepless nights.
Institutional risk
Local, state, and federal policies have a sizable impact on farmers’ prospects. Tax laws, regulations for chemical use, rules for animal waste disposal, and support payment restrictions all impact the farm business.
Human or personal risk
Whether pertaining to the farmer themselves or their employees, farming operations can be seriously hurt by personal challenges. Accidents, illness, death, and divorce can all open the business to risk, adding additional challenges to personal tragedies.
Risk management strategies for farmland owners
Risk management and farmland ownership fit hand-in-glove. Although numerous factors are outside of your control, you’re not completely beholden to the whims of weather, market prices, etc.
Here are some strategies you can adopt to help protect yourself and protect your asset no matter external conditions.
1. Cash rental agreements
Farmland leases primarily fall into two categories: cash rent and crop share. In a cash rental agreement, farmers pay a flat rate to the landowner to use the land, regardless of production yields and market prices. In a crop share agreement, both farmer and landowner share the profits.
While a cash rental agreement won’t completely isolate you from market volatility, it can help ensure the financial outcome you desire, regardless of external variables.
2. Crop insurance & other coverage
Weather events, pests, or disease outbreaks can all impact your farmland’s profitability. As such, it’s important to ensure that your farmer has covered the operation with all the necessary insurance products, including federal crop insurance.
Keep in mind that crop insurance only covers planted crops, and then only under certain conditions of damage. To protect the rest of your asset—on-farm structures, housing, fencing, etc.—you’ll need to purchase private insurance products.
3. Farm diversification
While many market & global trends are universal (consider Covid’s impact on the whole industry), many are limited to particular crops or livestock breeds. To mitigate against these risks, diversification is a powerful risk management strategy for farmers.
Common diversification methods include:
Crop types
Crop-livestock mix
Endpoints or weights of the same crop
Land use (i.e. hunting vs. farming vs. energy)
Double cropping
The best approaches to diversification involve building multiple revenue streams that function simultaneously. Energy farming, for example, can take up little space on the land, but generate significant revenue for your operation.
4. Crop futures
By using futures contracts or options, you can hedge against price volatility. This ensures that your grain is purchased at an agreed upon price, which is especially helpful in a crop share agreement.
Keep in mind that hedging is a double-edged sword—if prices go up, you won’t be able to realize that upside.
5. Soil health management
The value of your land is closely tied to the quality of your soil. As such, taking steps to keep your soil healthy can help not only increase your land value, but improve production yields and the value of the operation.
Common best practices include:
Testing the soil every three years to monitor conditions
Engaging in farming practices that replenish the soil (e.g. rotation, cover crops)
Implementing IPM practices to control pests and disease that could impact the soil
Engaging in sustainable water management to ensure optimal water use and prevent erosion
The science of soil health is constantly changing. By educating yourself on these practices, you can help to hold your farmer accountable so they implement them.
6. Financial and estate planning
Working with an accountant and financial planner you trust can go a long way to protecting the health and wellness of your operation. Budgeting, cash flow projections, and expense tracking can all help you foresee potential problems in advance, giving you ample time to nip them in the bud.
Want to make sure you’re getting the most out of your current land? Get a CashRentstimate today and see the true value of your farmland.