February 24, 2022
A farmer retiring in late 2021 sold two 10-year-old tractors for more than he paid new. Farmland, not development land, set records, with one parcel in central Indiana selling for $29,500 per acre. R.D. Schrader of Schrader Real Estate and Auction Co., Columbia City, Ind., reported that land his company sold in late 2021 brought 20%, 40% and even 60% more than actual appraised market value.
A balance sheet is a snapshot in time of your financial worth. If you filled out a balance sheet today compared to one year ago, and you own a substantial amount of land and machinery, it would likely reflect much higher values, simply because of price appreciation.
Related: Make better financial decisions
“Be sure you understand the implications of that increasing value,” Steve Kluemper says. “It isn’t due to any financial decisions you made; it’s simply the result of recent market trends.”
Kluemper was raised on a farm near Jasper, Ind., and spent 30 years in ag banking, including his last 10 years with GreenStone Farm Credit in Michigan. Two years ago, he started AgriStrategies LLC, an ag financial consulting business. Based in East Lansing, Mich., he works with farmers in Michigan, Indiana and nearby states.
“If you’re simply concerned about where you stand financially today, and that’s all you do with a balance sheet, then it’s not a problem,” Kluemper says. “It’s a true reflection of a moment in time, and it can change direction the next day.”
However, the temptation is to let a glossy figure lull you into a false sense of security, or the assumption that you’re managing farm finances as well as you can. Kluemper says the current appreciation in prices doesn’t indicate how well you manage farm finances.
To get a truer picture of your farm’s financial health, look at things such as cash liquidity and how much cash you can generate annually. Kluemper advises knowing your crop budget inside out. Be able to answer questions like these: What can you do to generate more revenue and net profit per acre, per cow or per sow? If you just rest on a balance sheet puffed up by appreciation, you don’t know if you could make your operation leaner and more efficient.
“My goal is to help people dig deeper so they can make more informed decisions,” Kluemper says.
If you’re only looking at balance sheets, especially when land values and used machinery prices are rising sharply, and your banker keeps saying yes to loans, you could eventually cut into working capital if your production methods aren’t returning net profits annually, he observes.
If you’re concerned about positioning yourself to retire in five or 10 years and keep the farm intact, or if a farm partner wants out and you’re deciding to continue, dig beyond balance sheets.
“Make sure other parties that will be affected, like spouses or children, understand the financial concepts feeding into your decisions,” Kluemper says. “Likewise, there may be reasons to bid more for land than current returns can justify, such as it’s the only chance you will get to buy it in your lifetime. Make sure others in the operation know how you’re reaching a decision, whether they agree or not.”
Learn more about the services Kluemper offers at the AgriStrategies website.
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