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Serving: WI

Do the math to see if land purchase makes sense

H. Abernathy/ClassicStock/Getty Images A red barn and silo in the middle of a cornfield
BUYING NEIGHBOR’S LAND: You must ask yourself if buying a parcel of ground is the best use of $600,000 worth of debt.
Agrivision: There are pros and cons to any land buy.

My neighbor got hurt in a farm accident earlier this year. He already sold his cows and now he wants to know if I want to buy 120 of his 500 acres located about a half-mile from my farm. My son and I farm 300 acres and milk 100 cows in central Wisconsin. We owe $100,000 on our parlor and freestall barn that we built five years ago, but that is our total debt. We weren’t really looking to buy more land, but my son thinks it’s a good idea. The land is productive and slightly rolling, and will likely average 200 bushels of corn per acre this fall.

My neighbor is asking $5,000 an acre, which is the going rate in our area for good farmland. My concern is that we have our bills paid, but we don’t have much cash to put down on this land, and we would need to finance almost the entire amount. What are your thoughts?

Tom Kestell: Sorry to hear about your neighbor’s misfortune. I want to congratulate you on your excellent financial situation. I’m sure this took many years of dedication and hard work. You are now in a position to take advantage of opportunities that come along. I believe that always keeping a solid financial position keeps you in charge of your destiny and certainly gives you leverage and peace of mind.

Buying this land has both pros and cons. On the positive side, it sounds like good land that is reasonably priced and is close to your operation. Many times, land only comes up for sale once in a generation. Land can be both a long-term asset and a liquid asset, because in most cases it can be resold if plans change. On the negative side, you will raise your debt per cow from $1,000 per cow to $7,000 per cow. You must ask yourself if this is the best use of $600,000 worth of debt.

The cost of owning this land per year will be $200 per acre per year for interest and $170 per acre per year principal payments plus taxes. So, this will amount to approximately $2 per bushel added to the costs of raising corn on this land. It will be very difficult to show a profit on raising crops with this high locked-in cost. Look at things short term and long term, and make a decision that is right for your family.

In my 45 years of farm ownership, I have added eight different parcels to my original farm. I have struggled with each purchase, the pros and cons, and in the end, we made them all work out. We have purchased land for as reasonable as $500 per acre and as expensive as $6,250 per acre. We have also not purchased several properties because we felt the timing wasn’t right. Some were too expensive to justify, and some were not of the quality I was looking for.

This is an opportunity and a challenge all in one. If you decide to buy, finance as long as you can at these low rates, because they will not last forever. Lock in your rate to give you peace of mind. Good luck with your decision.

Sam Miller: Fortunately, you are in a good financial position to be able to consider this purchase. There are several items for you to consider regarding this potential purchase, including need for additional feed or land to spread manure; further expansion of the business in the future; proximity to your existing farm; replacing any rental land; revenue from added land — crop sales or feed needs; financing of the purchase; cash flow to pay the debt. With interest rates low, this may be an optimal time for this type of purchase.

You can discuss a land contract with your neighbour or bank financing. You will need to provide additional real estate collateral for a bank loan, but you should be able to finance the entire purchase. Put together a business plan with additional land, added revenue (or reduced feed expenses, land rent, etc.) and the new debt to be able to demonstrate the repayment ability for the purchase. A University of Wisconsin Extension ag agent, farm technical college instructor or your banker can assist in analyzing the purchase and financing. Good luck with your decision.

Katie Wantoch: I’m sorry to hear about your neighbor’s farm accident. As we approach fall harvest season throughout the state, farmers and motorists will be sharing roadways more frequently. It’s a good reminder to inspect machinery to ensure it is road-worthy, with proper lighting and marking. Be sure to drive aware and encourage others to not drive distracted.

I hear your concern about financing this potential land purchase. It sounds like your farm may have a breakeven cash flow, and you’re not certain on whether you will be able to cover the new land loan payments. I think your first step is to determine if your farm has the capacity for long-term profitability.

Kevin Bernhardt, University of Wisconsin-Madison farm management specialist, has written cash flow articles, and shares how a rigorous analysis can help you become more aware and take proactive steps to determine the best path for you, your business and your farm. I would suggest you and your son take this time to review, budget and make the decision that works for your farm.

Look before you leap

I’m 26 years old and married. I have worked as an agronomist for four years since graduating from college with a degree in crops and soils science. I’m not getting rich, but I do make $50,000 a year. My wife is a middle school teacher. My dad wants me to quit my job and come back to the farm. He milks 125 cows and farms 360 acres in southwestern Wisconsin. My older brother has farmed with him for eight years, but he is leaving this fall to get married and is taking a job breeding cows full time.

I like farming a lot — cows, crops, all of it. But before I agree to farm with my dad, I want him to form an LLC with me and make an estate plan with our family attorney. I know I will be taking a pay cut, but if I’m building equity in the farm, that’s not a problem. I have $60,000 saved that I could invest in the cows or cows and machinery. My dad is hesitant to do that because he wasn’t willing to do it with my brother. Please advise.

Tom Kestell: To start with, congratulations on your career, your marriage and your ability to save at a young age. Farming together with your father can be rewarding and challenging. Evaluate your life as it is. You have a career, money in the bank and are using your education to help others. Your father wants you to quit your job, leave your career and commit to the success of his farm. For this to work successfully, I fully agree you need to see an attorney who specializes in this type of legal work.

You are not strangers, so you should be able to develop a long-range plan both to protect everyone’s interest and to help steer the farm to a successful and enjoyable transition from one generation to the next. Please involve your wife and both of your parents in the decision-making. Both your wife and mother will be instrumental in the long-term success of a well-thought-out plan. I encourage you to put forth your expectations and plans in writing, and have your future partners do the same. If people are not willing to compromise in the beginning, I highly doubt they will work out long term.

I believe a well-structured limited liability company can be the legal tool to transition both assets and talents into a long-term working agreement. Be willing to state your case clearly. Also listen and consider your parents views thoughtfully. And only go forward if all issues are addressed and everyone involved is satisfied with the agreement reached. I encourage you to have a written and signed agreement before you change your career. There is an old saying that goes: “The road to hell is paved with good intentions!” Lay the foundation first and then build your future careers on solid footing.

Sam Miller: Your question references what you and your dad want but doesn’t mention what your spouse thinks about this idea. I suggest discussing this first with your wife and develop your goals as a family. As a part of this discussion, discuss what your career goals also are or could be. I suggest you ask your parents to go through the same exercise and then agree to discuss these business and family goals. If you are not on the same page, this may not be the right decision for either of you at this time.

This process may take some time, as you each hear each other out and consider different possibilities. When you come to an agreement, engage an attorney to put it into writing so everyone understands the ground rules. You may want to engage an outside facilitator for this process; contact the Wisconsin Farm Center at the Department of Agriculture, Trade and Consumer Protection for a recommendation. Good luck evaluating your career options.

Katie Wantoch: Joy Kirkpatrick, UW-Madison farm succession outreach specialist, says, “Business succession just doesn’t happen. Producers must intentionally focus on the planning and work with a team of professionals.” I would encourage your dad to work with a facilitator, consultant or Extension educator to review various farm succession pieces and determine the best avenue for you and your dad to proceed. My first suggestion would be for both of you to develop and discuss intentions and priorities — does he want the business to continue? What are his priorities, and how do they compare to yours as the successor?

Another step to consider is developing a management transition plan and setting a timeline for when milestones may be reviewed and enacted. Timelines can’t be set in stone, but they should have target dates listed.

These are not easy decisions to make, and they can be overwhelming, especially when family is involved. Farm succession does take time, but a facilitator can keep everyone on track and accountable. Making sure everyone is on the same path will benefit your farm business now and in the future.

Agrivision panel: Tom Kestell, Sheboygan County, Wis., dairy farmer; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension agriculture agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email them to [email protected].

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