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Serving: WI
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PLANNING PROCESS: Your banker can assist you in analyzing the cost per acre of owning vs. renting land.

Make sure farm can handle land purchase payments

Agrivision: Over the years, farming has become increasingly risky.

My dad and I milk 200 cows, own 300 acres and rent another 400 acres in central Wisconsin. We owe less than $75,000. My dad is 65 years old and I’m 45. A couple of neighbors have approached us about buying some land. One is offering us 160 acres for $7,500 an acre. Another would like us to buy 80 acres for $8,000 an acre. It’s all cropland and it is highly productive. Should we buy more land? I think we can afford it. My dad thinks it’s risky. What are your thoughts?

Doug Hodorff: A very wise neighbor of mine once said, “I have never bought land that was a bad deal.” In the conversation, he also said when he bought the land, he overpaid for it. Remember, buying land is a long-term investment. Land has always appreciated in value. If you are sure your cash flow can handle the payments, then and only then should you consider purchasing the land. Have your accountant do the projections on owning this land. In your business, you will also have to figure out who will own the land. I hope you could figure out how an individual could own the land and rent it back to the farm. That in itself requires some creative thinking. There are ways to do that, but you will need an accountant to walk you through that process.

Sam Miller: There are several items to consider when evaluating an additional land purchase. Will the land replace some of your rented acres? Do you plan to expand the farm in the future? What is the farm transition plan between you and your parents? It would be difficult to buy land now and then have to buy out your parents’ interest in the business as they transition to retirement in the future. Land prices are local in nature but tend to be driven by some common factors — primarily, the return on the land (value of the crops grown), interest rates and proximity to the dairy for transportation of manure as fertilizer and crops as feed for the operation. I suggest discussing the transition of the farm business prior to discussing an additional land purchase. Your banker can assist you in analyzing the cost per acre of owning vs. renting the land. Good luck with your analysis.

Katie Wantoch: Is buying farmland a good investment? What are the risks that may be involved with this decision? Consultant David Kahan said it best: Farming is risky. Farmers live with risk and make decisions every day that affect their farming operations. Many of the factors that affect the decisions that farmers make cannot be predicted with 100% accuracy: weather conditions change; prices at the time of harvest could drop; hired labor may not be available; machinery and equipment could break down; and government policy can change overnight.

All of these changes are examples of the risks that farmers face in managing their farm as a business. All of these risks affect their farm profitability. While farmers have always faced risk, farming over the years has become increasingly risky. A casual approach to farming is no longer viable. Farmers need to acquire more professional skills, not only in basic production but also in farm business management, particularly in risk management skills. Skillful farmers and other businesspeople generally do not become involved in risky situations unless there is a chance of making money. Higher profits are usually linked with higher risks.

These risky but potentially profitable situations need to be managed as carefully as possible. Good risk management involves anticipating potential problems and planning to reduce their detrimental effects. Simply reacting to unfavorable events after they occur is not good risk management. I would suggest that you and your dad work on a plan that would review the purchase of farmland at these prices and determine if either of these purchases would indeed be a profitable decision for your farm business now and in the future.

Paying bills

My wife and I farm 250 acres and milk 115 cows. Milk prices have been going up, and it has allowed us to catch up on some of our bills. We stayed current on our mortgage and paid off the vet and the breeder in May and June. But we still owe the co-op $20,000 for feed and fertilizer. I’m wondering if we should borrow the money from our lender, or just set up a milk assignment and pay it off by next spring if we can work out something on the back interest charges. Please advise.

Doug Hodorff: In my view, you should make a request to your loan officer for a short-term loan to clean up any outstanding bills. Your suppliers are not bankers and should be treated as unsecured suppliers. By that I mean suppliers have no way of collecting dollars from customers. If you are falling behind on paying bills, you should be having conversations with your banker. Your back interest charges are your responsibility —pay them. Your suppliers have to borrow money to keep their businesses running also. Clean up your outstanding bills with a short-term loan from your bank.

Sam Miller: A partial budget analysis can assist you in evaluating this plan. Compare the borrowing costs from your bank to the likely interest costs you can negotiate with your suppliers. In either case, the cash flow from the milk assignment will pay off the bills either through a bank loan or directly to your feed and fertilizer supplier. Your banker can assist you in completing this partial budget analysis. Once these bills are caught up, consider keeping the milk assignment in place but into a savings account to build up some cash reserves for the eventual downturn in milk prices in the future. You can use the funds to take discounts for early payment, which lowers your cost of production going forward.

Katie Wantoch: I hate to be a broken record, but you should create a plan that reviews your options of continuing to pay the interest and balance at the cooperative versus a new bank loan. While you’re creating or updating your business plan, it’s always beneficial to look back over your previous financial statements and analyze how your business is doing. Debt-to-equity ratio is a quick measure of financial leverage risk, helping to assess a farm’s long-term viability. Farms frequently use owner equity plus borrowing to finance farm acquisition, long-lived improvements, operating expenses or equipment. Debt-to-equity ratio is simply total farm liabilities divided by farm owners’ equity.

Borrowing has multiple benefits when farming returns on debt far exceed costs. Modest debt enables farmers to use their farming resources efficiently. For example, a farm may need to construct direct marketing building improvements or to buy conservation tillage equipment; both are long-lived expenses that improve using a farm’s resources. While there are no firmly established rules for acceptable debt-to-equity leverage, successful farms operate with very low debt.

According to research by Rutgers Cooperative Extension, farms with debt exceeding 60% to 65% of capital (that is, leverage of 1.8-to-1 or above) are less viable over the long term. While higher leverage is beneficial in predictable enterprises, it is a key association with unsustainable farms that operate in unpredictable markets. Take a look at your financial ratios, and determine the best path for the future of your farm business. 

Agrivision panel: Doug Hodorff, Fond du Lac County, Wis., dairy farmer; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Dunn County, Wis., Extension agricultural agent specializing in economic development. 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

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