For most farmers, decisions about whether to buy land can be filled with emotion. As they say, “they’re not making any more of it.” And it’s true that getting new acres is one way to grow your operation. But when ground comes up for sale near you, how do you know whether it’s the right time to buy?
I’ve heard of recent auctions in the Corn Belt where land has gone anywhere from $19,000 per acre to over $20,000 per acre! Most of the land sales I’m hearing about are at least 30-50% higher prices than just a year ago.
As land prices are soaring, our advisors have been getting more questions from our farmer clients who have had ground come up for sale near them recently. Like I mentioned above, it can be easy for land decisions to become emotionally driven – if we don’t keep the right questions and considerations in mind when going through the decision-making process.
Ask these questions
This winter, you can talk through questions like these with your farm’s leadership team and advisor and/or lender:
- Does it make sense for our operation to even consider buying land at these prices?
- Is the market in a bubble when it comes to land prices? Could the market be at or near the top right now?
- If interest rates are about to go up, perhaps substantially, will it be difficult in a few years to sell land for anywhere near the current prices? (Right now, interest rates are still historically low – and many farmers are sitting on cash from high yields and good prices this year.)
- Can these land prices get even remotely close to cash flowing unless corn and soybean prices go much higher?
- If you’re an investor, what kind of cash rent can you expect to get over the long run and not just in this high price environment?
Still want to buy?
If you work through these questions and find that you are still interested in purchasing a particular piece of ground, then it’s time to dig into the financials and feasibility of buying that land. It’s smart to do a land feasibility study to see the direct impact of the potential purchase on your overall operation and its financial well-being – what that looks like before and after the purchase.
As part of the feasibility study, these two questions are key to determine:
- Will the farm’s working capital stay in a strong position and equity stay over 50%?
- How would a new land note fit in the operation’s debt service coverage ratio, especially if in a few years the market moves back to lower commodity prices?
Thinking through and being able to answer those two questions with solid numbers is necessary information before making a decision about a potential land purchase. Plan to work with your advisor and/or lender this winter to get the right numbers to help you make decisions about this soaring land market.
What about 2022 grain markets?
Another topic on farmers’ minds as we move into winter and 2022 is marketing plans – and where the grain markets may be heading into the new year. A tailored marketing plan that’s flexible with market moves is key.
Our market advisors partner with and bring education around different marketing tools. They also help farmer clients with planning and execution around marketing decisions.
Get a free two-week trial of our marketing information service (MarketView Basic). Your free trial includes regular audio and video updates, technical analysis, recommendations and more. Or learn more about our market advisor programs and offerings at www.waterstreetconsulting.com.
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.