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Is this a good time to buy farmland?

Farm Progress Cornfield
BUYING FARMLAND: Land is the most valuable asset on a farm balance sheet. How you acquire land and how much you need are important decisions.
Agrivision: Calculate what loan payments would be to help make land-purchase decisions.

One of our neighbors recently told me he is going to retire. He plans to sell his cows this fall and his land after Jan. 1. He has 160 tillable acres. Decent land around here sells for $5,500 an acre, and this land is average or slightly above average. My son and I milk 180 cows and own 240 acres. He owns the cows and machinery, and I own the real estate. He has no debt and I owe about $185,000. I’m 63 years old and my son is 34. We rent 120 acres 2 miles from our farm. My question is, should he buy the land, should I buy the land, or should we form an LLC and buy it together? Or would we be better off not buying land? What are your thoughts?

Tom Kestell: I think it is time to have “the talk” with your son. You are both at the age when transition plans need to be formulated and put into action. It appears that you have already done a great job of beginning the process, with your son owning the more liquid assets. These assets can be used to leverage the purchase of the land, if that is what is decided by mutual agreement. The most important question is: Can the current operation support the payments on this investment?

The second most important thing in a land purchase is the interest rate that will have to be paid on the borrowed money. As we all know, interest rates are rising sharply and will probably continue to do so. I would investigate every financing possibility, such as Farm Service Agency first-time land ownership loans for your son. I would also check out land-contract possibilities with the current owner. How major purchases are financed many times can spell the difference between a happy investment or an unwelcome burden.

The next part of the equation is: Who should purchase the land? Let’s think about this. With a 20-year mortgage, you will be 84 when it is paid off. Just the thought of that should give you the answer. Yes, your son should purchase the land. This is who will end up with it anyway. This is not to say you should not be involved in the purchase of the land as a team member. You could do this by co-signing the loan to ensure a lower interest rate or to use your assets to ensure the best terms available. Talk over the pros and cons of this investment, and then if the decision to purchase is agreed upon, seek the best and most economical path to success with this long-term investment.

Sam Miller: You are both in good financial position to consider buying this neighboring farm. There are several considerations to address your question — first is setting the price and then figuring out how to pay for it. Assuming you have no cash to put down on the purchase, you will need to finance the entire amount. Compare the annual payment against the existing rented land (which I assume you will be giving up) to determine how much additional cash flow will be going toward this purchase. Buying the neighboring farm is a rare event, so examine this purchase in detail.

As for who should buy the land, that is a conversation between you and your son. Given his stage of career, it might make sense for him to buy it, but that would likely alter owner draws between the two of you. Sit down together to work out the financing and returns to labor and management for each of you. An Extension ag agent, technical college instructor or dairy business consultant can assist in this analysis. Good luck evaluating this opportunity.

Katie Wantoch: You and your son have a successful farm business with a relatively small amount of outstanding debt. This may be a great opportunity for your business to own land that is closer, but there are a few things to contemplate before making a final decision. Land is the most valuable asset on a farm balance sheet. How you acquire land and how much you need are important decisions. Owning land eliminates the uncertainty of losing leased land and provides you with control of management decisions, such as conservation practices, crop rotation and soil amendments. However, owning land may require you to take on loan payments that could create cash-flow problems and limit the ability for other capital purchases or improvements.

Leasing land doesn’t tie up cash flow and allows you to invest in new technologies or machinery upgrades. I would encourage you and your son to discuss the future of your farm business and if this land purchase makes sense. Consider what the business will look like in three, five or 10 years? Also, how involved will you be and how much ownership do you have in assets of the business? Answers to these questions will help you and your son make an informed decision about your neighbor’s land decision.

Is growing corn best option?

My 25-year-old daughter and I farm 200 acres and milk 140 cows. We own the land and cows together. We grow 100 acres of corn and 80 acres of alfalfa. The balance is in pasture for the heifers. We grow all of our forages, but we buy corn for grain, which isn’t cheap. We would like to rent an additional 100 acres so we can put up our own high-moisture corn. I figure we can combine 20 acres of that as dry corn and sell at harvesttime if we have decent yields. That will give us some cushion in bad crop years if we need it. Corn ground around here rents for about $190 an acre and yields 175 to 190 bushels per acre in a good year. Do you think this sounds like a good idea?

Tom Kestell: To begin with, congratulations on the successful teamwork between you and your daughter! I am always pleased to see young women given the opportunity to be successful team members on farm enterprises.

In the past 20 years, many farms have opted to grow their forages and purchase their grain needs. This has worked well for many years because dairy farms could purchase corn for little more than the cost to grow it. However, this has changed in recent years. The cost of producing corn has risen sharply, but so has the profit potential. If you have storage facilities for high-moisture corn, many of the handling and drying costs can be saved — and at the same time, you will be able to feed more nutritious feed. I have been using high-moisture corn for over 50 years and have seen the pros and cons firsthand.

Corn must be harvested at the proper moisture, stored properly and processed properly to maintain its maximum feed value. I am a huge fan of high-moisture corn and consider it a pillar of our feeding program. It also speeds up harvest, reduces field loss and minimizes shrink or handling loss. It eliminates expensive hauling and processing costs, as well. I would talk to dairy farms in your area to learn how they grow, harvest, store and process their high-moisture corn. Like anything, there is a learning curve, so learn from others’ mistakes.

I would recommend wholeheartedly this move, even if you purchase the high-moisture corn off the field the first year and then move into growing your own in the future. Try to do everything right in each step of the process and I assure you that you will be happy with the results. Always put your effort into the things with the highest return on your investment of time and money.

Sam Miller: This question can best be evaluated using a partial budget analysis. Start by comparing the cost to purchase corn with the cost of growing a like amount of corn, either on a per-bushel basis or for the total amount of corn you need annually. The growing costs include crop inputs, rent, any machinery or custom hire expenses, storage, and labor. When you calculate the growing cost, stress-test using different yields and/or different prices for corn. Corn prices are higher than a few years ago. Be certain you aren’t making a decision to grow vs. buy based on a couple of high corn price years when it may be cheaper to buy in the long run. Determining the cost of production will guide the appropriate decision to rent and grow vs. continuing to buy. An Extension ag agent can assist with a partial budget template to guide this decision-making exercise.

Katie Wantoch: I suggest you compare your options using a detailed budget. Purchasing corn is currently a low-risk option for you, while the price might not be cheap. Someone else is taking on the higher risk of producing corn, knowing that a weather event may impact yields or higher input costs may reduce net profits. If you decide to rent farmland to grow corn, you will be taking on higher risk. You will need to spend some time on how to best manage this risk.

You don’t mention if you have a combine to harvest corn for high-moisture and grain. You likely have a planter to plant the corn, but if you don’t own a combine, will this work need to be custom-hired? If you do own the equipment, will you have time for the additional labor, or will this need to be hired? These additional costs, plus seed, fertilizer and chemicals, can add up. Sit down with your daughter to review all your costs that might be associated with renting this additional land and compare that to the lower-risk option of purchasing corn.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, statewide University of Wisconsin Extension farm management outreach specialist/professor of practice. 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 fran.oleary@farmprogress.com

TAGS: Corn
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