Scythe & Spade Blog

Benefits of Leasing Property (Part 2 of 2)

By: Patina Thompson

Leasing lands in today’s volatile real estate market can be beneficial to a well versed tenant. Tenants can enjoy the continued productivity of farming while avoiding the ups and downs associated with land values. Quality wins out in this instance, because even with fluctuating commodity prices, good land can still grow good crops.
The tenant still has to be educated and cautious when entering into a lease contract. Both parties should identify their responsibilities clearly. Rented land could be made more productive with improvements which often increase the value of the land, can improve irrigation system efficiency and allow the tenant to increase productivity. Such improvements are typically the financial responsibility of the landowner but sometimes a tenant may be reimbursed for improvements with prior written approval of the Landlord. One drawback could come up if you have a year-to-year lease. The improvement may add a more permanent value to the property that the tenant cannot reap during the term of the lease. Such improvements, when practical, cannot be removed by the outgoing tenant.
Our team at Scythe & Spade is dedicated to protecting both the landowner and tenant with a well developed lease. The lease should outline which party is responsible financially in different situations and who is going to physically maintain existing and future structures. A “standard” of how the property should appear should also be addressed in the lease. The tenant should also consider who is responsible for paying water assessment fees, property taxes or other applicable fees according to each situation or location. It’s important to keep detailed records of such transactions. Maintenance of systems and structures on the property are also responsibilities of the tenant, of which time and money also play a factor. 
In any case, a Landlord and Tenant relationship should be open, honest and economic for all those involved. Give us at Scythe & Spade a call to see how we can help you and build a solid lease that can benefit you for years to come. After all, a good lease on good land can grow good crops.

Benefits of Leasing Property (Part 1 of 2)

By: Patina Thompson

Buying and leasing land is an investment many may not consider, but it has many benefits. Leased lands can benefit from responsible grazing and farming practices, as well as benefiting the landowner with a lower tax rate and some added income. Absentee landowners can get rewarded even further with a competent farm management company overseeing this sometimes complicated task.
According to the Assessor, Agricultural land in Arizona is land which is one or more of the following; Cropland of at least 20 gross acres, Ten or more gross acres of permanent crop, Grazing land with a minimum capacity of 40 animal units, or land devoted to high density use in the production of commodities including grapes and cotton for marketing. Lands classified as agricultural are taxed at a lower rate. This increases the profit margin to the landowner while simultaneously giving them a tax break. 
Farming of agricultural lands can greatly improve the marketability and, ultimately, the value of the land as a whole. As with any investment, advantages and disadvantages exist. Advantages are easy to notice if you can find a good tenant to steward the land. As a disadvantage, landowners are open to tenants doing damage just as with a residential lease and good tenants can be hard to find. During this wait, landowners incur the expenses associated with the land.
A grazing lease is another option with somewhat of a smaller risk for damage because you’re typically dealing with minimal equipment and minimal expenses paired with livestock.
Feasibility studies and budgets are helpful to forecast what financial gains are expected. Leases are typically based on an acre-unit or animal-unit basis and are paid annually. Feasibility studies can evaluate what returns you can expect within 3-5 year time frames. Scythe & Spade is familiar with rental rates for all areas of Arizona and can perform a financial analysis of your returns tailored to your long or short term goals.
If you have the luxury of owning any sized piece of dirt that’s not being utilized, you should think about the option of leasing. Scythe & Spade can provide an experienced farm and lease management team to oversee operations and locate tenants. Why not think about leasing and enjoy the many benefits it can provide? Contact us for a listing of available lands to lease or to inquire about leasing your land out from our diverse database of tenants, with a knowledgeable team behind you, it’s a win-win situation!

Times of Change

By: Patina Thompson

In today’s uncertain economic time, it’s important for farmers to be open to change. Change is so influential that President Obama focused his campaign around it and times are definitely changing; commodity prices for corn and soybeans are declining, the real estate market is not as active, and the world is increasingly looking for environmentally friendly alternatives to operate.

The faces of America’s farmers are also changing. According to the recently released results of the 2007 Census of Agriculture from the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS), during the past five years, farm operators in the United States have become more demographically diverse. The Census counted nearly 30 percent more women as the principal farm operator. The number of American Indian, Asian and Black farm operators increased as well and Hispanic farm operators grew by 10 percent.

The actual number of farms in the United States has grown by 4 percent. Nearly 300,000 farm operations have been added since the last census in 2002. Compared to all farms nationwide, these added farms tend to have fewer acres, more diversified production and younger operators who also work off-farm. The percentage of farmers that have internet access has doubled since 2002. Of those producers accessing the Internet, 59 percent have a high-speed connection.

In these times of change, one stable factor is the face and reputation of Scythe & Spade. At Scythe & Spade we are constantly updating and enhancing our skills and knowledge to prepare for these changes. With new acreage reporting tools and streamlined processes, our services have evolved with the times. With change being so influential we want you to be able to continue your operations and let Scythe & Spade take over the arduous tasks in order to simplify your life.

GREED or FEAR

Greed or Fear drives every market cycle.  This was evident in the late 80’s real estate boom and subsequent bust,  where irrational exuberance (Greed) drove land values beyond economically sound values, justified by a perceived shortage in land.  Fear materialized in the Resolution Trust Corporation’s liquidation of primarily defunct S&L non performing assets.  Again rampant speculation (Greed) drove technology stock prices beyond economically sound values in the Dot Com bubble which eventually collapsed.  Yet, we never seem to learn from our mistakes and Greed has once again driven Real Estate values beyond economically sound prices and today we see fear forcing a correction.  Although seemingly unpopular,  some economists argue that a recession could be good for America, and if a downturn is in the makings,  question whether the Fed should try to prevent it.  But that is another issue.  Are we becoming a nation of bubbles ?

To fully appreciate the effects of this latest downturn in the real estate market or any previous cycles,  we have to look more closely at land speculation.  Home builders, investors and even lenders have been caught off guard and our political leadership is currently seeking ways to cushion the fall and avert inflationary much less recessionary conditions in the future.  Land speculation is different than speculation in corn for ethanol for example.  Speculative farmers provide commodities without a contract or order.  If a customer does not materialize,  we add to the stocks on hand and prices fall.  It is often said, farmers are their own worst enemy and quickly solve boom and bust cycles by overproducing.  In the event exceptional profits accrue,  others will rush to cash in and increase supplies, thereby forcing equilibrium.  This competition effectively converts commodity speculation to more and cheaper commodities.  As a result, a Farmer must be a highly efficient, low cost producer to survive.  Fortunately, at least for now,  we do not anticipate a farming financial or supply crisis but rather see the potential inflation fueling commodity values in the short term with increasing volatility, especially in the grain markets.

Conversely,  land is not a commodity,  it’s supply is fixed and as such there is no automatic self correcting function built in. Currently and historically,  there have been no shortages of land to justify the speculation but we have seen more than one cycle where prices were inflated and subsequently crashed in search of equilibrium.  No one knows for sure how long this correction will take.  Wild cards include the Feds monetary policies, land owner’s willingness to sell at a loss and home builders willingness to adjust prices.  Every day we see headlines referencing troubling economic news about the national real estate market, crude oil values flirting around $100 a barrel and declining Global stock markets.  Buyers have disappeared overnight, more than 120 mortgage lenders are defunct and some sizeable banks are writing off huge losses. Liquidity in the market is severely limited.

No one knows for sure how long the correction will take.  Those of us in Agriculture are enjoying historically high commodity prices which I expect will correct in the intermediate term (with the exception of cattle markets that are limited somewhat by the gestation and growth cycle).  Certainly we know that speculative land prices will have to fall,  those speculators (and their lenders and Investors) who are holding high priced land in their portfolios (whether performing or non performing) will have to hold long term or similarly lower values to liquidate.  Lenders will start to see more and more defaults and have to consider their options and management capabilities in the speculative land class.

-BM

Plan for the Worst and Hope for the Best…but be proactive about it!

Mortgage delinquency rates hit their highest point since 1985 last month and while the data we watch is based primarily on home mortgages, it is a good metric by which to compare other real estate related debts.  In three different studies, we found that credit losses are likely to be around $400B.  Most of these losses will be carried by leveraged financial institutions, but a portion will be shouldered by seller’s who sold via a land contract, which is sometimes called an Installment Sale, Land Contract or Contract for Deed.

At Scythe & Spade we are particularly concerned about farm properties on the fringe of metropolitan areas, where increased demand from speculators and developers drove prices to irrational levels.  Many of these previously farmed parcels, in the hands of non–farmers, have sat idle, grown a crop or two of weeds, had irrigation and other farming resources and assets lost, removed or otherwise compromised due to a lack of maintenance and have lost their ag exemptions.  The result;  increased expenses, decreased revenues and numerous issues to be resolved.

Sometimes the lender, whether it be a financial institution or individual, is able to gain control of the property amicably through a Deed in Lieu of foreclosure.  But more often than not,  the process involves foreclosures, bankruptcies and litigation.  In such a situation,  the Trustee, Trustor and Beneficiary should mutually agree that, regardless of the outcome,  it is in everyone’s best interests to protect and then maximize the value of the asset, with any liabilities mitigated, until an agreement is reached.  Quite often however,  these parties can not or do not agree for a variety of reasons. 

Scythe & Spade can offer assistance by acting as either an operating or liquidating  receiver and take charge of the farm and facilities, protect resources and generate revenues, manage liabilities until either potential investors are identified and the assets are sold to a new investor or some other resolution is reached.  We have the financial and management expertise necessary to direct the operations and affairs of the asset and, if necessary, to liquidate the Property.

It’s not all bad news though,  there is a bright side to all of this too.  As a result of the weak dollar,  foreign demand has increased for everything from technology to tractors.  Soaring exports, ethanol subsidies, low interest rates (thanks to the Feds efforts to ease the effects of the .Com and now Housing bubbles) and record high commodity prices (agflation) have boosted farm income and stability and Lenders should not, as a result see many Farm defaults or foreclosures.

-BM

Politics and the Farmland Market

Long term,  we feel the bailout efforts by our government will help build money supplies and improve liquidity but eventually this will result in inflation.  Land as opposed to equities, is an excellent long term hedge against inflation.  Adding support to this concept is the recent apparent burst in the commodity bubble, helping temper the speculative nature of investments in farmland we have experienced of late.  Farmland in general is not highly leveraged and farmer’s balance sheets are healthy, putting agriculture on firmer footing than other areas of our economy.  We can only hope that this trend continues but as commodity prices fall and inputs stabilize at record high levels the farmer’s balance sheet may suffer.  Keep in mind too that farmers are buying more farmland and consolidation continues at a rapid pace.  This is no more evident than Co Banks recent issuance of $200 million of Series c preferred stock in an effort to enhance their ability to continue meeting their customers borrowing needs which are at an all time high.  Nonetheless, concern resulting from the subprime mess is resulting in more conservative lending on farm Real Estate.

So what does all this mean:

• Farmland is in a niche of its own, somewhat insulated from other real estate investments 
• Banks will help curb over leveraging of investments in land 
• As the economy moves toward a recession, we need to look for safe havens and areas to place money otherwise invested in equities 
• Trends in agriculture (consolidation and stabilization) will help mitigate the speculative nature of investment in farmland of late

BM

Landing the Land

As a farmer you have a most envious career yet are faced with mounting challenges, the least of which is an increasing demand for farmland with increasingly limited supplies.  Nationwide, land ownership has shifted from predominantly owner/operators to absentee owners and tenant operators. 

But this is not the only trend to affect your business plan.  Consolidation and concentration in Agribusiness is rampant. The Concentration Ratio of the top 4 business in an industry (CR-4) was established to measure the % of business the top 4 companies control. For example in the Retail Grocery business the CR-4 is 40% and in Beef processing 80%.  As this consolidation continues, vendors are starting to ignore smaller producers and serve the larger producers.

As a farmer you will never break away from being the Low Cost Producer.  Consolidation and cooperation merely for survival will have to be a part of your new and improved business plan, at least as long as you are producing commoditized products.  Some of your neighbors will find a niche market or be able to preserve identity and operate in a differentiated market but the lion share of producers will have to grow and expand to attain economies of scale for shear buying power.  Fortunately with the advent of the stacked gene, auto steer and precision farming systems, we will be able to operate on more acres with less labor and machinery, albeit requiring more skilled labor and more expensive equipment.  We feel strongly that as a farmer, opportunities to grow will far exceed the capital available to secure these opportunities and the greater limiting factor will be access to skilled labor. 

In such a competitive market then, how can you differentiate yourself from the other half dozen or so farmers pursuing that very same tract of land?  We would like to suggest that you adopt some of the sales and marketing tools utilized by the most professional salesmen calling on you regularly.  Consider the Landlord an integral part of your farming operation much in the same way you consider your banker and CPA an integral part of your operation.  Develop a Corporate brochure and proposal template.  These materials can be your best avenue to new business if done right.  Done wrong however, they are a waste of time.

For starters, first consider who your prospect is, acknowledging that every landlord is just a little different.  Then focus not on what you can do, but what you can do for your landlord…ultimately tell him why you will be a better tenant.  Identify these benefits and back them up with examples and references.  Bind your proposal, use color, and include photos and graphics.  Perhaps provide an organizational chart, crop plans, maps, key financial ratios and perhaps even credit rating or score.

The Landlord’s primary concerns will be qualifying your ability to perform financially limiting his risks and most importantly knowing that his most prized farm is maintained in a clean, eye pleasing condition that not only he but his associates, friends and partners  will appreciate.

   -BM

Welcome to the Scythe & Spade Blog

Welcome to the Scythe & Spade blog.  Please check back regularly for the latest updates, news, events, and our thoughts on all things agri-business.

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