Minding Ag's Business
Courage to Buy Land in an Uncertain Market
Farmers rarely express buyer's remorse over the purchase of a strategic piece of farmland. That's because the majority of farm operators intend to own it for a lifetime--and beyond if they have family with an affinity for farming.
That fact is worth mulling now that land sales are hitting erratic prices in key Farm Belt states, Farm Credit Services of America CEO Doug Stark observed during wrap-up remarks at the DTN-The Progressive Farmer Ag Summit 2014 in Chicago last week. By his assessment, U.S. agriculture's 10-, 20- and 30-year future remains bright, so financially secure operators may see 2015 as a year to pounce on opportunities that strengthen their long-term business plans. Growers need to be assessing how to deploy assets today for tomorrow's opportunities, he reasoned.
Iowa land values tumbled 8.8% between October 2013 and September 2014 in the Realtor Land Institute's latest survey, Iowa realtor Steve Bruere pointed out earlier in the conference. FCS America's year-end appraisal of land trends in its four states isn't finished, but it's likely the December 2014 numbers won't be nearly that pessimistic.
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"So to buy or not to buy. Like Shakespeare, that is the question," Stark said. "Bids are so erratic, you don't know how some sales will fall out." The problem is that land prices seem to be moving all over the board, with Southeast Iowa setting a new high in the last few weeks while auctions further west ran about 40% lower than a year earlier, FCS America's appraisers report. Bruere had two auctions in early December that brought about 15% less than what he would have expected a year earlier.
Several years of low or negative commodity returns are bound to take the boom out of land prices, since farmers account for about 80% of the buyers, Iowa land surveys show. Without cash jingling in their pockets, farmers may bid less aggressively. Those with cash in hand may hesitate to buy land until they think it has bottomed, Stark noted.
But postponing purchases in a sinking market may not make sense since mortgage rates can negate cheaper prices, cautioned Stark. In his example, someone who buys 160 acres at $10,000/acre today with a 50% down payment and a 5% mortgage would have payments of $250/acre. Someone who buys at $6,667/acre with a 50% down payment and 7.5% mortgage would still be paying $250/acre.
The key is to ask yourself is how long you will own the land, whether you can afford it and whether you have enough working capital to last through the low part of agriculture’s down cycle, Stark said. (How much working capital is enough? Stark didn't specify, but other Farm Credit system speakers at the Summit were encouraging customers to set aside $150/acre in working capital on corn acres, and $70-$80/acre for soybeans, then prepare for two to three years of losses at that level).
Stark also urged growers to know their metrics and how they compare to their peers. That means sizing up your cost of production on an accrual basis, pinpointing your land costs, knowing equipment investment per acre, fixing long-term rates and resisting aggressive prepayment of fixed-rate loans. Good risk managers are also mindful of their crop insurance coverage and implementing flex leases where possible.
If you have taken steps to weather adversity, don't wait for the absolute bottom in land prices before you dive in, he advised.Take courage.
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