By Jeanne Bernick
Top Producer Editor
One of questions that farmers often ask long-time ag economist David Kohl is whether they should buy more farmland. Kohl, a professor emeritus at Virginia Tech, says that with 87% of most farm balance sheets tied up in real estate, it's a valid question.
"What's important to remember about land values is that they don't like an increase in interest rates, and we have the possibility of higher interest rates in 2010,” Kohl says.
Kohl says there are several critical mistakes that farmers often make when buying farm ground. They include:
- Purchasing "love” property. This is the land right next door that the farmer has eyed for decades and only comes up once every 30 years. "Inevitably, a farmer will pay 30% more than this property is worth just because he is in love with it,” Kohl says. "To make love property pay, you need working capital and a liquidity reserve. It's doable to make those properties work, but you have to be careful.”
- Buying land just because money is cheap. "Be careful here, because the payback is the tough part,” he says.
- Earns and turns. This is the mentality that you will own a base amount of land and then rent and lease it to multiple entities. "You have to be very disciplined about using working capital,” Kohl cautions.
- Cash gets land locked. The farmer who puts all of his cash into land as a safe investment has to keep in mind that cash is now "land locked”, Kohl says. "So if you have a downturn and you are forced to sell that land for 40 cents on the dollar, that doesn't do you much good,” he says.
For more from Kohl on trends in agriculture, watch for upcoming issues of Top Producer