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Corn+Soybean Digest

Should I Buy Land Or Rent It?

Each situation is different, but all should be looked at objectively and not emotionally.

This will be a far better year financially than most farmers realize. Many of our clients are meeting or exceeding their gross-dollars-per-acre goals and haven't yet done the play on crop insurance claims. Many are looking forward to expansion next year and are wondering if they should buy more land or rent it.

To answer that question, you need to look at your records on a farm-by-farm basis. One of our clients in Iowa did that last year. He took yield monitor data and assigned all production costs to each farm. For machinery costs, he used Iowa State University (ISU) rates to keep every farm on a consistent basis for comparative purposes. The findings were very interesting.

Naturally, farms where you have a lot of equity are more profitable than many leased farms. But it was surprising to see the profitability differences among leased farms. Some farms with the highest cash rents were the most profitable leased farms and, conversely, some of the lowest cash rent farms were the least profitable.

This data also can be useful in countering a landlord's request for rent increases, especially if that farm is one of your least profitable. Very inexpensive software is available from one of our clients for this analysis if you need it.

There are other issues to consider, though, including your financial risk-bearing ability, which will be the subject of another Riskwise article. It's important that a portion of your farming base is owned land. This can provide your homestead, equipment and grain storage. If you ever get into trouble financially, some of these assets can be exempt.

The biggest variable factor in determining whether land is affordable is not the price but the terms. These include the amount of down payment, interest rate and amortization. They can make all the difference.

I ran a feasibility analysis last week for a Wisconsin client who's looking at buying a farm with 18% down on a 7% contract. Plus, he would get a house to live in and otherwise would have had to build one. It's affordable, but wouldn't have been with a 30% down payment and 9% mortgage rates.

When I do a feasibility analysis I add an appreciation factor. I use 3.5-4% annually because, according to ISU data, Iowa farmland has appreciated an average of 4.38% for the last 50 years and 3.83% per year over the last 100 years. A 50- or 100-year trend is good enough for me! This, added to a 5-6% cash return, makes the return comparable to many other investments over the long term.

If your financial condition can stand another purchased farm and still retain the needed "shock absorbers" to withstand adversity, I recommend buying rather than leasing. The advantages are stability of farming base and a good return, plus it's a good long-term investment. The downside is it ties up a lot of capital, reduces your flexibility for making other investments and reduces your cash flow during the early years of ownership.

If your financial condition cannot stand more debt and still retain the needed margin for adversity, I definitely recommend leasing. The advantages are flexibility, less needed capital and generally better cash flow in the short run. More importantly, you can't afford to risk your entire operation by taking on more debt than is prudent. The disadvantage of leasing: Your operational risk is increased because, if your leases are on a yearly basis, you could lose them.

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