I have some working capital just in case good land becomes available, as lower grain prices force some of my more aggressive cash rent neighbors to throw in the towel. Even so, I’m leery of adding more acres when I don’t see much hope for better returns down the road. What’s the best way to determine if an expansion makes sense? — L.V., Ohio

A lot of us are going to have the opportunity to expand at unprofitably high cash rent levels, where the existing tenant has depleted his own working capital and where the landlord could care less, still insisting on an exorbitant rent.

If you are considering buying more acres, equity is king. (Photo: Craig Aurness/Fuse/Thinkstock)

And we can’t blame the landowner for recognizing a marketplace where numerous renters prioritize the size of their operation over profitability. Any of us could be the largest show in the Midwest overnight. All it takes is money. There are simply too many confirmations of families selling their own ground so that they can sustain their land base and pay the high-end rents.

So, if you are considering more rental acres, you have to pencil at least a breakeven with insurance or APH yields, and our current low price levels. Do not compromise your financial position.

Even more important, try to only deal with landlords who are willing to look at your side of the profitability equation. Then show that in return for your transparency, you are ready to offer price- or yield-based rent bonuses if times improve. If you cannot get a handle on your own costs or question your numbers, use university budgets as a baseline. Do not fall into the trap of letting the spreading of machinery and equipment over more acres lead a growth opportunity decision. 

If you are considering buying more acres, equity is king, followed closely by working capital. It is not a good time to be creating negative cash flows with a land purchase. If your land payment is about the same as a cash rent alternative, it’s time to buy.

The ultimate mistake would be to deplete your working capital cushion for a farm acquisition that puts the rest of the operation at risk. With current interest rates low and negative operating margins forecasted, it’s wise to only give up the minimum amount of cash required to finance the purchase.

Jerry and Jason Moss operate Moss Family Farms Inc. Send emails to [email protected].