By David Albin
As farmland values potentially diminish from their sustained peaks of previous years, it may be tempting to take advantage of the lower prices. With the right timing and opportunity, adding property can be a wise investment. But purchasing farmland involves more considerations than most capital expenditures. The questions below can help guide your property search and inform the best decision for your operation.
How productive is the land?
A little homework can pay dividends later by helping you understand the property’s income potential. The seller should be able to provide information on criteria, such as the number of tillable acres, soil type, soil fertility and drainage, all of which have an impact on profitability. For example, if you find the land has poor drainage and needs to be tiled, you’ll need to include that cost in your calculations.
Does the land have an accurate legal description?
The keyword to focus on here is accuracy. A good legal description will help you understand the exact acreage you intend to purchase. Look for a detailed survey with a metes and bounds description; then do some calculating on your own to ensure the advertised acreage matches up. Property Valuation Administration records are another option to see how many acres are reported within the tract in legal records. And your local Farm Services Agency office may be able to provide aerial photos that give you an unbiased view of the land.
When should I start working with my lender?
Strong relationships can play a significant part in determining the success of your operation. Consulting with your lender a year or two in advance of a major purchase will help you both evaluate the financial strength of your operation, which you can use to start your search. And the sooner you get started, the sooner you can prepare to meet the down payment and other cash flow demands. Your lender also can help determine the financing package that works best for your needs, such as establishing a fixed interest rate to make long-term budgeting easier.
What effect will this have on my operation next season and beyond?
A significant purchase should come only after a thorough examination of your operation. One consideration is your role after the purchase. Additional land means additional responsibilities. This means either more hands-on time by you managing the farm or finding additional help, giving you a more managerial role. Either way, a shift in day-to-day decision-making is required.
A significant purchase should also have you thinking about succession planning. If you don’t already have a plan in place, start thinking about how more land and a potential long-term loan will affect your operation’s stability in the future. If you do you have a succession plan in place, evaluate how this purchase will affect the person taking over the business.
Is my operation financially strong enough to take this on right now?
The million-dollar question is: What can you immediately afford? To answer this, look at your working capital situation. Do you have enough cash on hand to make a down payment and meet your other financial demands? Generally, you will need to contribute 25% to 30% cash as a down payment; otherwise, you’ll need to meet that minimum range with additional collateral in lieu of cash.
Consider how using cash or assets as a down payment will affect other areas of your operation. Extra expenses beyond the purchase of the land and daily operation, such as facility improvements, fencing and equipment upgrades, might be necessary with more acreage. You’ll need some cash to handle those additional obligations.
What are my operation’s expenses and income potential?
Think about the land’s long-term potential to generate income beyond the first year or two of the purchase. Financing with a long-term loan requires close analysis of your operation’s fixed costs, variable costs and income potential. Above all, you’ll need sufficient financial capacity to withstand inevitable market downturns. Yield and grain prices will fluctuate, but knowing your five-year yield average will help evaluate your operation’s longer-term financial strength.
Investing in additional acreage for your operation isn’t a decision to be made overnight and should not be taken lightly. But as you spend time going over plans for your operation, these questions will help you identify the right decision when an opportunity arises in addition to emphasizing long-term prosperity.
Albin is the regional vice president for western Kentucky at Farm Credit Mid-America.