Make money from your land during hard times

“Recession is when a neighbor loses his job. Depression is when you lose yours.”

-       Ronald Reagan

How can farms stay profitable during a recession? Make money from your farm under all economic conditions.

A recession is a sustained period of decline in economic activity, often defined as two consecutive quarters of decline in GDP – normally we are considered to be in a recession whenever the media makes enough noise about the economy slowing down. There is no hard and fast rule on how recessions affect landowners, but land keeps its value over the long term and so is a good investment that allows many ways to make money.

Recession by region or sector

Recessions normally do not uniformly affect all sectors of the economy, with some exceptions, such as the 1930s Great Depression and the 2008 Global Financial Crisis. There are often differences based on:

-       Region: Some parts of the world or some states might be hit harder than others. The Texas economy, for example, depends to a large extent on the oil industry and suffered in the 1980s when the oil price was low. Although Texas is more diversified today than in the past, declines in the oil price still have wide ranging impacts on Texas, as they did in 2020.

-       Sector: Some parts of the economy are more vulnerable to recessions, such as luxury goods like boats. Others, like basic food production, are more resilient. This means that landowners who produce staple crops such as wheat and corn are unlikely to be affected by recessions. Some investors even consider farming to be recession proof.

Other trends, however, can lead to high fluctuations in farm income. The recessions shown in this chart did not lead to falls in farm income. Even in the case of the 2008 crisis, farm income actually increased in the following years.

Farm Income from your land varies with trends you cannot control

Although farm income often moves independently from changes in GDP, other factors have a very strong effect on farm income:

-       Commodity price trends cause the value of crops to vary greatly. In the early 2010s, even as the world was stuck in the Great Recession, farm income increased as China and other emerging markets drove demand for corn, wheat, soy and other agricultural commodities. This commodities boom ended later in the decade, reducing farm income.

-       Weather has a huge impact on farm operations: too much rain leads to rotting plants and flooding, while drought makes it hard to grow anything. Cold weather can stunt plant growth and even ruin harvests.

Indirect weather impact on farming matters too: when persistent drought hits the Midwest, irrigation might save the harvest, but the Mississippi’s water level might be too low in certain areas, which slows down barges that transport farm production, increasing transportation costs.

Fluctuations in farm income

Fluctuations in farm income are a fact of life for farmers. Hedging can help secure the sales price of crops that will be produced, but the production quantity will still vary with weather. One way to secure income from your land is by leasing part of it to a solar developer. Contact us to help you understand if a solar project is possible on your land. Oil and gas or other minerals might also be found on your land, but oil lease revenue also fluctuates greatly due to commodity price trends and the actual production of oil on your land, which will decline each year after drilling.

Since landowners often choose to lease their land for a solar project in order to secure stable income, it makes sense to dive a little deeper into solar project economics in order to understand how solar projects can balance out the fluctuations in farm income.

Do solar projects make money during a recession?

Solar projects yield steady cash flows, which means their investors can commit to a fixed lease payment to the landowner who leases the land for the project. This means that solar projects are mostly recession proof, and the lease income they yield to landowners won’t vary with economic cycles. To understand why, we need to explore the nature of solar projects.

Economics of a solar project: a 50 MWp solar project in Texas

Solar farms are very long term investments, and most of their cost is concentrated into the initial investment. The cost of a 50 MWp solar project in Texas is around $60 - $70 million, when you consider the cost of land, permitting, development, financing, construction and commissioning. The annual cost to operate such a project is very low, since the solar panels, electrical equipment and structures are designed to last many decades. The main costs involve washing the panels every few months if they are covered in dust, and maintaining inverters or other electrical equipment as needed, with some equipment replacement required after a few years of operation. The cost of paying for the land leased for the project is also quite low. For example, a 50 MWp solar project could be built on 300 acres of land, and would pay annual lease income of $700 per acre, or $210,000 per year.

The income earned by a 50 MWp solar project is normally composed of two parts:

-       Contracted revenue through a Power Purchase Agreement (PPA) with a utility or a corporate buyer who commits to buying the produced electricity at a fixed price. For example, if this project produces 70,000 MWh of electricity per year, 80% of this, or 56,000 MWh could be sold to a nearby cement company through a 20-year PPA at $50 per MWh, earning $2.8 million per year for the solar developer.

-       Variable revenue through electricity that is sold to the market. In this example, 20% of the produced electricity, or 14,000 MWh per year, would be sold into the market.

o   During a year in which the economy is strong and demand for electricity is high, the average market price of electricity (during sunny hours) might be high, at $100 / MWh, resulting in $1.4 million in variable revenue – a huge upside for the developer

o   During a year in which the economy is weak and electricity demand is lower, the average market price of electricity (during sunny hours) might be low, at $10 / MWh, resulting in $140,000 in variable revenue – a disappointing outcome that is mitigated by the $2.8 million in contracted revenue, which never changes regardless of the market price of electricity.

Project revenue would be calculated as follows in both examples:

How solar project income affects the money landowners make from solar leases

As we can see from this example, the solar project has a long term contract to sell most of its production (80%) at a fixed price, no matter what happens in the electricity markets. This guarantees income for the solar project, which is used to repay debt, pay for maintenance, and (most importantly for you as the landowner!) pay for the solar lease. In our example, the $210,000 in annual solar lease income can be easily covered by the $2.8 million in Contracted Revenue (orange bars) through the PPA, so the solar project will always earn enough money to pay the landowner for the solar lease – no matter what happens to the market price of electricity.

Since solar projects are long term investments that depend on stable cash flows to pay back the initial investment, they can be a great source of stable income for landowners who are exposed to the ups and downs of farming. If some of your land is available for a possible solar project, contact us to help you obtain an offer to lease your land from the developers within our network.

LEARN MORE

How valuable is my land? How to negotiate a solar lease

How can I make money from my land? Grid interconnections needed for solar

Leasing my land: Oil, wind or solar? Or all of the above?

Texas land use past and present: how solar fits in

Case Study: A Texas Landowner who found a solar lease that allowed him to retire