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STICK TO YOUR GUNS: Determine how much you can pay for farmland before you attend the auction.

Discipline key when considering land purchases

Profit Planners: Gather information to determine how high you can bid and stick to it.

A 160-acre tract half a mile away from a farm I own sells this month. It’s average land, 158 tillable acres. When I found out last summer that it would sell, I was thinking $7,000 per acre. With stronger-than-expected prices now, it might take $9,000 per acre. I’m in a decent capital position and could swing it, but what does that look like as a long-term investment? The land between it and mine is in an estate and could sell in the future.

The Profit Planners panel includes David Erickson, farmer, Altona, Ill.; Mark Evans, Extension educator, Putnam County, Ind.; Jim Luzar, landowner and retired Extension educator, Greencastle, Ind.; and Steve Myers, farm manager, Busey Ag Resources, LeRoy, Ill.

Erickson: Prioritize these potential purchases based on importance to your farming operation. Determine your limits and stick to it. Are you a cash buyer or a borrower? If you’re borrowing most of the money, your return is probably limited to the appreciation value of the farm until you get it paid off. I know you can build equity through annual land payments that you might otherwise pay for cash rent, but you must be committed to that philosophy for the long term.

Evans: Push the pencil to make sound decisions. Be ready to participate should the land go for $6,000 to $7,000 per acre. Regarding the ground in an estate, is it better ground? Can you handle both, or are you better to wait? What is your family and personal situation? Are you needing to expand to bring in additional family members? Though you may not want to sell for development, is the ground situated where it has development potential? The key is knowing where your comfort boundary is before the sale and knowing when to stop.

The most troubling word in your inquiry is “average” land. The Purdue University Agricultural Economics Department reports average farmland in Indiana in 2019 sold for $7,011 per acre. If you enter into bidding thinking it may fetch $9,000, you’re preparing to offer a significant premium. I would advise budgeting costs and returns and setting a disciplined bid.

Luzar: You describe your finances as “decent.” Read this Farm Business column, where Michael Langemeier of Purdue University outlines how lenders look at working capital. Adequate working capital and preservation of working capital should take added importance during periods of uncertainty and tight margins. A substantial net worth would make this conversation more comfortable.

The other variable is the farm next door. Does it possess strategic benefits? What is the quality and size? Taking on two real estate purchases will warrant keen financial analysis and review of your long-term goals. Very few landowners say no to buying the farm next door. Approach the first 160-acre tract with a disciplined budget and bid cap.

Myers: Consult your banker — even if you’re paying cash — and your bookkeeper and ask, “It is not a question of if I can, but a question of if I should?” When big-ticket items like this come up, it’s time to gather thoughts and opinions from your trusted advisers, including real estate professionals, as well as any partners in your operation. Ask them to be candid in discussing the pros and cons of this decision, and try to take emotion out of the process.

TAGS: Finance
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