We recently interviewed Thad Taylor, director of agribusiness lending and forest products specialist with Horizon. Rising real estate prices are all over the news, with reports of homes selling well above asking prices.

While not in the news as much, the same phenomenon is happening to farmland and timberland tracks, impacting many farmers and forest products operators.

At the same time, we're experiencing record high lumber prices, causing challenges across the industry, especially with construction projects. Thad discussed these issues along with their impacts.

First, let’s talk about real estate and the rising cost of farmland and timberland in recent months. From your perspective, why is this happening and why should buyers be concerned? 
It all comes down to supply and demand. Some of the changes in historical demand forces and supply dynamics are some of what's causing this. Buyers should be aware, instead of concerned, with what's going on right now. Buyers need to be aware that if they participate in the market right now, they'll be paying more for a given property, than they did two years ago.

Some of the supply-related forces and demand-related factors that you see right now are because there's a lot of businesses that have learned to cope with employees working from home, and home can be a lot of different places. It doesn't necessarily need to be at the office. People have more flexibility now as to where they live. That's causing a little bit of change in demand in certain areas, where maybe there wasn't as much before.

The other factor is supply, or the things that make properties come onto the market and cause sellers to decide to list with a real estate agent. Some of those things maybe haven't changed very much, and if that supply tends to trickle in at a given rate, historically speaking, it really doesn't change. If there's any uptick in demand for additional listings, that can change pricing, at least in the short-term. 

That’s an oversimplified way to cover it, but one of the things we know about the pandemic is that there have been businesses that have been hurt and individuals financially impacted. But like with any other beneficial or painful economic event, not all sectors are always impacted symmetrically. Not all individuals are impacted exactly the same way across the entire economy.

There are businesses out there that are doing well and looking to expand. There are individuals who've been less impacted and maybe have significant savings that they want to deploy or need to move, for one reason or another. Those things all conspire to have an impact on real estate market. 

Another couple of things worth mentioning are the Dow is up year-over-year, about 34%. For people who directly or indirectly participate in the equities market, it makes people feel a little bit more wealthy and a little bit more competent.

Additionally, advertised 30-year mortgage rates are very affordable with rates between 2.75% and 3%. That allows people to be confident with bid behavior when they're acquiring real estate. 

Lastly, the Federal Reserve liquidity facilities issued in 2020 are about $542 billion. That's a large injection of liquidity in the US economy. 

So a combination of additional liquidity, a lot of which has made its way into the US equity markets, the Dow being up 34% year-over-year and fairly affordable interest rates, all allow people to go into the real estate market, who want to acquire real estate and do so with some competence.

The parallel to that is those things that create that competence, they can also go away in a hurry too. 

Those are some of the economic or supply and demand forces I see in this real estate market.

What are the impacts of the current market conditions for individuals who want to finance their land purchase? 

If a person is going to buy today and borrow a significant percentage of their purchase price for real estate, there's a chance that the comparable sales that are used for appraisals will lag today’s market because appraisals are depended on historical comparable sales. If comparable sales from 2019 and 2020 are being used for the construction of an appraisal or the analysis to make an appraisal today, those historic sales prices are going to be what drive appraised values today, and a buyer needs to be aware of that.

It may cause their lender to not want to lend upon the entire purchase price, but possibly a more conservative evaluation, which is going to rely on the appraisal. 

Therefore, a buyer should be prepared for putting cash down to cash fund a bigger portion of their purchase today as compared to a few years ago because today's appraisals might not support today's asking prices.

There usually is a lag between when real estate sales occur at an elevated or depressed price and when the appraisal comparable sales ultimately catch up with that market trend.

Next, let’s talk about the sky rocketing lumber prices, which are significantly adding to the cost of any building project. What’s your perspective on this increase and what can we expect for future lumber prices?
I'll start with some of the facts and then I'll get into some observations of mine. Like any kind of discussion of economics, a lot of that is subject to interpretation and assumptions, but I'll start with the facts here.

The most recent southern lumber prices for softwood are about 192% above where they were a year ago. That's a significant rise in softwood lumber prices, and softwood being the material that's used to frame and build houses. Hardwood lumber, on the other hand, is used for molding, flooring and trim in most residential construction. We'll stick just to softwood lumber because it drives construction costs for houses, barns, second homes, cabins, etc. Those prices are up about 192% year-over-year, which impacts the quoting cost and the construction cost for any new project.

That increase in price has to do with a lot of things. Now we'll get into some of the economic discussion and the assumptions. 

Ultimately, this comes down to supply and demand as well, and the supply is not so much driven by the amount of softwood standing timber in the United States. It's driven by the weakest link in the supply chain, no matter how many softwood trees are standing in the United States. The various links in the supply chain include mill capacity, trucking capacity, warehousing capacity, planing mill capacity and kiln drying capacity. All of those various things have to work in sync in any supply chain, in order for the industry to deliver what's demanded on time. In this case, those things cannot be changed in a hurry. 

What can be changed in a hurry is consumer behavior. If we have consumers who stockpiled in their mind and in their bank accounts over various projects that they would like to do, they can deploy that pent up demand fairly quickly. It's just a matter of deciding to do the project and getting your checkbook out. 

What can't be deployed fairly quickly is a 25% increase in mill capacity, a 28% increase in trucking capacity or a 40% increase in planer mill capacity. Those things cannot be deployed as quickly as the swaying human demands and decisions to get a checkbook out and deploy some liquidity into the construction market.

So those are some of the things that are impacting lumber pricing right now. I think we're going to see lumber pricing come down a little bit in the coming year, as some of the additional supply response has come online, like I mentioned about mill capacity. 

Mill capacity can be added, but it's simply not the flick of a switch. It might take anywhere from 12 to 18 months for additional mill capacity to come online or for a given mill to be able to add a shift or additional hours in the economy. Where folks have struggled running businesses here in the last several months is getting incremental labor to run their facilities.

Nonetheless, I think we're going to see some of the demand slack off just a little bit, and it doesn't have to slack off too much in order to impact pricing, and I think we're going to see a supply response.

It might take a little bit of time, but I think we'll start to see lumber prices start to fall back in line with historical levels, somewhere around 12 to 18 months from now.

As we wrap up, is there anything else you would like to share with our listeners today?
If a buyer in today's market has the ability to be patient with this market, there could be some benefits to waiting just in case this recent increase doesn't have a lot of legs and might be fleeting. If a person can afford to be patient, there might be some benefit there. 

On the other hand, if a person does need to move quickly and can't afford to potentially lose out on an opportunity, it certainly makes sense to participate in this market especially if they don’t have other alternatives. 

However, in this market, given the speed with which the market has risen and given some of the overall economic liquidity factors that seem to be behind some of this, there might be some benefit to being patient with this market.

For Rodney and Cathy Carson of Martinsburg, Bedford County, there was never a question of their life's dream. "We wanted to farm," said Cathy. "Rod always enjoyed farming."

The couple moved to the Morrison's Cove area, rented a farm, saved money and eventually purchased their own farm in 1990. Today, their 107-acre farm includes a 120-head Holstein herd, milked in a parlor, three times a day. Through the years, they've also added a free-stall barn, an alley scraper, a trench for silage and new equipment.

After graduating with a degree in agribusiness management from Penn State in 2011, Jake, the youngest of the Carsons' children, knew he wanted to continue in the family business. "While I earned the degree, Penn State also opened opportunities to travel in the US and even other countries," Jake noted. "I saw different styles of diaries and applied the ideas I liked to our farm."

With the addition of Jake and his wife Kim to the business, Rod said, "We wanted to develop a transition plan and someone recommended Lacey Coleman, an Horizon accounting officer."

"We talked to a lot of people before we met Lacey," explained Jake. "It's a real jungle. There are 1,000 different ways to form an LLC. We needed someone to fill in the blanks."

From the Carsons' LLC research and experience, Jake thinks Horizon meshed both the accounting and legal areas of expertise. "Some folks were strong on the legal aspects of LLCs and forgot about accounting and vice versa. That's where Lacey worked for us, understanding both sides," he said.

"Once we decided on the LLC, it took some time to work through the structure," Cathy explained. "Lacey was very patient with us. She was at the farm a lot to make it happen."

For Lacey, reviewing the farm's financials with both generations was a key first step. "This allowed the entire family to set realistic short- and long-term goals based on financial feasibility. It helped bridge the gap of how and why certain management decisions are made," Lacey said.

Lacey notes that every farm has its own unique set of circumstances and an LLC structure isn't for all businesses. "After taking the time to consider their options and understand the LLC structure, the Carson family made a smooth transition into operating as a family farm entity," she explained. "They are fortunate to have a second generation that loves the farm as much as the first generation."

Since Rock Ridge Dairy LLC was established in 2014, Lacey continues to help the Carson family with any tax consequences or record keeping ramifications associated with their new LLC structure. "Her expertise definitely helped us through it," noted Jake.

Lacey also prepares their monthly records and provides payroll support, tax planning and tax preparation. "Working with the Carson family is an absolute pleasure!" Lacey said.

"We like our relationship with Horizon because everyone has a farm background," said Cathy. "They understand us."

As we prepare to welcome a new group of interns to our team this summer, we are celebrating National Internship Awareness Month. Let’s catch up with a few former interns who joined us as staff members after graduation.

They will share their experiences on their path from intern to employee. Introducing Danielle Ciccolini, who worked with our Susquehanna Valley credit and appraisal teams in 1999.

What have you been up to since your internship?

I interned in the summer of 1999, graduated from Cornell University in December 1999 and began working at Horizon on Jan 3, 2000, which was the official first day for the Horizon association.  I have been an Horizon employee as a credit analyst, portfolio manager, credit leader and credit manager and currently as the field operations manager. 

What was the most beneficial aspect or most important thing you learned during your internship?

The most beneficial aspect for me was observing a new organization forming. I rode with loan officers on field visits but also completed independent appraisal sale study work. (My husband would say it was helpful for me to learn to read a map.)

What did you take away from your intern days?

I built relationships during my internship that helped me move into a full-time role after graduation.

One word to describe my internship experience:

Adventurous

What advice do you have for young adults?

Take each opportunity you get to shadow more experienced folks in the workforce. Many of them are willing to share their contacts and help you start your career.

Rick Allen owns and operates Crabapple Valley Farms, a 78-acre farm. He serves as a director on the Fayette County Holstein Board and co-chair of the Fayette County Fair dairy show committee. We asked Rick a few questions about what inspired him to join Horizon. Check out his answers below, and be sure to say hello at our next event!

One fun fact about your business or career:
I developed an agri-entertainment business in 1980 out of necessity to supplement the dairy farm. Today, the Haunted Hayride is the main enterprise at Allen-Hill Dairy.

Why did you choose to work with Horizon for your financing needs? 
My father was a Farm Credit customer. I never considered another lender. 

Why did you decide to run for the Board of Directors? 
I serve on local and state boards with other agriculture organizations. When the opportunity came to run for the Horizon Board, I wanted to serve. 

How has the Cooperative changed through the years? 
In my 10 years, I witnessed a strong desire and commitment by management to help improve the lives of all Horizon customer-owners.

Advice you’d share with other customer-owners considering running for the nominating committee or a board seat in the future?
Make your intentions to serve known to a nominating committee member in your region. If the committee nominates you, research the history of the Farm Credit System. It is truly amazing how much this cooperative has done in the past 100 plus years!

Horizon has the pleasure of working with a dynamic Board of Directors that helps to provide strategic direction and oversight. Interested in becoming more involved with Horizon?

Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University

The COVID-19 black swan event has three phases. At first, it was a dirty bird causing mass disruption in economics, businesses, households and personal lives. Then, a nasty, angry bird will rise during the second phase. Countries will point fingers and the blame game will result in disruption of commerce and trade with extreme market volatility. The angry bird will create widespread social, political and economic anguish. The third phase will be the phoenix stage. This is the mythical bird that rises from the ashes of destruction. The phoenix is more powerful, innovative, agile and resilient than before. 

Through these three stages, how can farms and ranches best navigate the white waters, whirlpools, waves and torrents in the wake of this sudden-impact event? 

Get your financials in order and monitor them on a monthly basis. Document your losses if government and financial assistance is received. Compare these losses to the last three years to determine what changes were beyond your control. Maintain good communications with your lender. 

What is your liquidity position and equity depletion rate? Start your analysis by calculating the burn rate on both your working capital and equity. Divide your losses into working capital. Working capital is a measure of financial liquidity calculated by subtracting current liabilities from current assets. To calculate the burn rate on equity, divide your losses into your total equity.  

Before liquidating any assets, conduct an analysis of potential deferred taxes. Deferred taxes on low-basis assets or fully depreciated assets can create tax liabilities. In some cases, the amount of deferred taxes can be burdensome. 

Seek financial and emotional help, if needed. Do not be ashamed. Many individuals and businesses are in a similar situation. 

Finally, good, old-fashioned outside the box thinking with other positive and realistic businesspeople, inside and outside of agriculture, can set the stage to rise stronger and smarter like the powerful phoenix. 

Dr. David Kohl, Professor Emeritus Agricultural and Applied Economics, Virginia Tech University

A management mindset will be a critical element for success in the decade of the 2020s in agriculture. The COVID-19 pandemic has accelerated change and created disruptions in markets, consumer trends and how one navigates everyday life. While some will equate the disruption as a negative, others will view it as an opportunity.

For example, let's delve into the mindset of Producer “A” and “B” from the viewpoint of an agricultural lender. Producer A engages the lender and wants to know how their performance compares to others. Producer A seeks out what others are doing, is inquisitive, never quits and is always striving for improvement. This producer has balance and focus on the immediate operations, but also thinks longer-term with an eye on the horizon. They have a “glocal” mentality, meaning that they think globally about the variables that influence their decision-making, but have the ability to filter this information to their specific business and lives.

On the other hand, Producer B has the mindset of hoping to survive another year and wondering if their lender will provide financing. They often expect the lender to fill out the financial statements and have little understanding or motivation to know what the numbers are telling them. Producer B is waiting for commodity prices to save them financially. The “magic silver bullet” or the next big moneymaker is their hope and dream.

Contrast this to Producer A who is very process oriented, proactive and adaptive to the situation as the economic climate changes. Producer A often utilizes an advisory team, which is analogous to assistant coaches for input and perspective in the decision-making process. Producer A takes a proactive approach in preparing the next generation in alignment with their abilities, skills and passions. They believe that transition management is more than asset and equity transfer, but a new management team that often adds energy and foresight. Producer A creates a culture of sweating the small stuff and following the Five Percent Rule, coined by Dr. Danny Klinefelter, Professor Emeritus at Texas A&M. The Five Percent Rule means being 5% better in many areas of the business when compared to peers.

Finally, Producer A finds methods to challenge the status quo to maintain a competitive edge. The 2020s will be a decade of economic and financial divide for those that see disruption as an opportunity, rather than making excuses and not taking responsibility. 

1. Communicate

Begin discussing the future of your farm business now. Get everyone’s goals, objectives, concerns and questions on the table for consideration. Assuming what people are thinking and feeling about the business often leads to misunderstanding and will be detrimental to the whole process.

2. Evaluate

Complete a business evaluation from a financial and production perspective. This evaluation will help identify potential problems in these areas. It is critical to know if the business is earning profits, growing net worth and has the capacity to support another generation of owners and managers.

3. Build a Team

Identify trusted advisors who can provide important advice during the business transition process. Depending on the transition’s level of complexity, several advisors will be helpful to you in identifying and clearing the hurdles you may encounter. These advisors include an attorney, lender, accountant, consultant, financial planner and others who can provide valuable counsel.

It is very difficult for a family or business member to act as the facilitator of the transition team because he/she is busy running the business. Selecting a team leader or facilitator to direct the team is an important consideration.

4. Invest

Expect the process to be an important investment of resources, securing the farm business’s future that you spent a lifetime building. The transition process can take anywhere from six to 18 months to complete. During this time, expect to spend several hours in meetings with advisors, more or less depending on the complexity of your transition.

In addition, there will be some level of financial investment for the services advisors provide. It may take several thousand dollars to complete the transition process. There are financial resources available in some industries to help farm families complete a transition plan. Your advisors may be able to identify and acquire these grants.

5. Get Started

Begin the process by developing a timeline of when you want to complete your initial transition plan. Keep in mind it will take several months. There will be many tasks to complete by the business owners as well as the advisors. Plan meetings when the business is less busy with day-to-day operations. Appoint a team leader to keep the process moving.

Putting these ideas into practice will get you started on the right foot with your farm business transition process, and ensure a properly completed and implemented transition.

Many early 2021 in-person events are transitioned to webinars. Below is your one-stop-shop for all agriculture-related webinars. Check back for updates.

Farming for the Future Webinar Series: Join Horizon Farm Credit for a series of Farming for the Future webinars this winter to position your farm business for future success. Webinars include:

• January 7, 12 p.m. – 1:15 p.m. - What’s Your Business IQ?, Dr. David Kohl
• February 4, 12 p.m. – 1:15 pm. – Shifting Your Mindset and Shaping New Opportunities for the Future, Amanda Radke
• March 4, 12 p.m. – 1:15 p.m. – Weather and Farming: Using Information to Make Decisions, Eric Snodgrass

Learn more and register. 

How to Create a Transition Plan Webinar Series: Join Horizon Farm Credit, Horizon Farm Credit and PA Farm Link for a webinar series on what to consider for a farm transition plan and how to put your plan into action. Webinars include:

• January 11, 11 a.m. – 12 pm. – Introduction to Creating a Succession Plan
• January 25, 11 a.m. – 12 p.m. – Analyzing Your Financial Position for Creating a Succession Plan
• February 8, 11 a.m. – 12 p.m. – Communicating with Your Family about Transitioning the Farm
• February 22, 11 a.m. – 12 p.m. – Questions about the Legal Implications around Transitioning the Farm

Learn more and register. 

2021 Virtual Sustainable Agriculture Conference: Pasa’s annual Sustainable Agriculture Conference is one of the largest gatherings of sustainable farmers, food system professionals and changemakers in the nation. The 2021 virtual conference will be held January 19 through February 5 and feature 90+ sessions with 100+ speakers. Learn more and register. 

2021 Virtual Dairy Summit: The 2021 Pennsylvania Dairy Summit is going virtual! The four-day event, February 8-11 includes a line-up of dynamic speakers, virtual farm tours and other exciting networking opportunities. Learn more and register.

2021 Virtual Mid-Atlantic Fruit and Vegetable Convention: The 2021 virtual convention, held February 8-11, will feature three or more concurrent educational sessions each day on a variety of topics. Learn more and register. 

Penn State Extension Webinars and Courses: Penn State Extension offers a wide range of online courses and live webinars. View a listing of educational offerings in your industry sector. 

2021 Keystone Pork Expo, Poultry Progress Day and Horizon Manure Summit: The convention, now held June 23, is moved to Lebanon Valley Expo Center. Guests will enjoy quality educational sessions for pork, poultry, and manure haulers with outstanding keynote speakers. The PennAg Industries Annual Banquet will be held the evening before. Learn more.

Kristina McAllister, regional manager with Horizon, recently discussed the importance of taking care of ourselves and the resources available to help farmers.

Kristina, you grew up on a farm and your husband is a farmer. From your perspective why is it important that farmers take time to care for themselves, especially during this time?
Farming is a stressful job, even in good times, and the COVID-19 pandemic and resulting economic turmoil have only added to farmers’ stress. Most farmers I know don’t take time for themselves. There always seems to be field work to do, animals to care for and equipment to fix!

Squeezing in a bit of time for rest and relaxation away from the busyness and chaos is essential to help us be our best for our families, employees and businesses. With a refreshed mind, it allows us to better tackle the day’s challenges and react to situations, even those outside of our control, with a clear plan.

We all need to do a better job asking for help when we need it. Instead of piling more on ourselves, we need to be comfortable leaning on others when we need a helping hand or a listening ear.

What resources are available through Horizon to help customers in this area?
Horizon has several resources to help our customers manage stress and seek help. 

One new benefit we are pleased to offer is access to our Member Assistance Program (MAP). MAP is a confidential and free counseling service for Horizon customers and their family members. Help is available 24/7, 365 through a specific phone number. When customers and their family members call the MAP, a licensed, experienced clinician conducts a counseling session and assessment over the phone. Members and family members may opt for a video counseling session as an alternative. Reasons to use the MAP include concerns related to marriage, parenting, stress, depression, work, alcohol, drug use, abuse and grief or as a preventative measure. Online resources are also available for legal services, financial services, seminars, relocation center and a searchable database for providers.

Another new resource from Farm Credit, launched in the last couple of weeks, is a free, online farm stress management course. This course is offered through a partnership between Farm Credit, American Farm Bureau Federation, National Farmers Union, Michigan State University Extension and University of Illinois Extension. It is open public and helps farmers develop the skills to learn how to manage their own stress and support their friends and neighbors.

Are there any other thoughts you'd like to share with our listeners today?
We know that farming is a 24/7 job, 365 days a year. Farmers work hard every day to take care of their families and businesses. I encourage farmers to take advantage of these resources available, and don’t be ashamed to take some time off and take care of yourself.

Are you young and beginning in your career? Whether you’re a first generation dairyman, farming in the evening after your day job, or working as an Horizon loan officer – here are some tips to help you be successful!

Find a mentor.

A mentor serves as a trusted advisor. Someone who you can bounce new ideas off of and share your struggles with, and who is invested in seeing you succeed. Your mentor can be a family member, an individual from your community, an industry professional or a business partner. Many times you develop a personal relationship with your mentor but it’s important to maintain a certain level of professionalism – that way he/she can give you or your business a “kick in the butt” if necessary.

Ask for help.

It’s not feasible to be good at everything, let alone have time for everything (even though I try), so don’t be afraid to ask for help. Some of the most successful business owners I know are excellent delegators – they are good at asking for help; especially when they are facing challenges in their businesses. Use your resources. There are an abundance of industry experts available to help your business grow in areas you see potential.

Try something new.

You learn something new every day – if you want to. It’s easy to practice the model, “if it’s not broke, don’t fix it,” but in order to grow and improve your business or advance your career, it’s necessary to embrace new ideas and try new things, even if it means stepping out of your comfort zone. Take advantage of educational opportunities presented to you. Go on a farm tour, enroll in a class or watch a webinar. Learn from your peers. Absorb everything you can. And most important: don’t forget to share your ideas and experiences to help someone else learn as well.

Assess your progress.

Take time to reflect and analyze yourself and/or your business. Most importantly, celebrate your successes! Set goals and recognize when you achieve milestones. Next, look for areas that could use improvement. Great managers are always striving to be better.

Don’t work too hard.

It’s easy to work, work and then work some more. Especially when you’re just starting a business or are invested in a career you are passionate about. It’s important to have a work-life balance. A little time away from your “desk” will help keep you fresh-minded and energized about your work. Your friends and family will probably enjoy spending time with you, too.

Horizon Farm Credit is invested in helping young and/or beginning farmers succeed! Contact your loan officer or local branch office for more information about educational opportunities and young or beginning and small farmer programs.