Farmers - are you diversified and why it matters
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Figure 1: forward curves of corn prices at various dates, yellow is the live data
Diversification is the primary mechanism utilized by financial investors to manage risk. Soy and corn is not diversified. Additionally owning farmland rarely diversifies farming operations. For example 2023’s falling net farm income, rising interest rates and real estate cap rates means that land values are expected to go down, not up, for the first time in years. Risk management is a subject looming large in farm country for 2023. Source Bloomberg Terminal accessed May 22, 2023
The main driver of land price appreciation is NON AG use of the property, such as solar. Therefore, property with zoning that prohibits solar may reduce property values – the obvious non ag use of solar is not allowed.
Off on a tangent: certainly, less than 1% of all US farmland is eligible for solar. Preservation of farmland is an important public policy objective; however, the main cause of loss of farmland is urban expansion and not energy development. Also the ag land is already dedicated to energy production. Corn is used to produce energy already – 50% of Indiana corn’s end market is ethanol for example. The energy vs. food use is a debate 20 years old, and food remained in plentiful supply. Furthermore, US ethanol demand is expected to go down over time.
Zoning that prohibits solar create a double failure to diversify - - no solar income, and no alternative use value in the underlying land!.
Solar provides farmers with an income stream that IS diversified and helps to provide free cash flow even in poor ag years. Realize that the solar land is determined by proximity to power lines, and this land is therefore a very small portion of all ag land is eligible for solar land. Farmers can lease their land eligible for a solar project to a solar developer to provide steady income to their overall farm operation.
Why diversification matters
2023 is shaping up to be a very risky year in corn country. Due to high input costs resulting in high cost of goods sold, “break even” costs are high at approximately $5.94/bu.
The problem for farmers is the price of corn at harvest time in 2023, the December 2023 corn price is currently $5.06/Bu., see Figure 1. Assuming a negative basis of -$0.20/Bu, this puts expected forward revenue below of break-even costs. And the forward curve for corn has fallen far and quick in 2023 as evidenced by the three forward curves shown in Figure 1 – beginning of year price was fine, month ago, OK, today, very scary.
This tool indicates that the expectation of achieving a $5.50/Bu price of corn (about the price a average productivity soil farm growing corn will need including basis to break even) is only 30%, there is a 69% probability the price will be lower. The expected value is $5.00/bu – below break-even; there is a 25% probability of only achieving $4.40 at harvest time, well below break-even costs and approaching cash costs of about $4.35/bu.
Putting eligible acreage in a solar lease at $1,000/acre-yr vs. $200/acre-year for an ag lease, or exposing oneself of a near zero net margin year such as the case in 2023 is an outstanding opportunity to diversify and manage overall farm operation income without changing the rural character of the host communities.
 (Purdue 2023 A) Mintert, et.al., Corn & Soybean Outlook Update…Following USDA’s February WASDE Report, February 10, 2023, Purdue Center for Commercial Agriculture