Rethink the idea of boosting profits by purchasing land
It’s time to discard your old land strategy. "Think of land as an annuity," suggests Michael Swanson, Wells Fargo senior vice president and consultant. That means when you invest in increased crop production, you have a 30- to 40-year horizon.
While that might seem obvious, it’s not the way many land purchases are made, Swanson notes. Ten years ago, the best way to grow long-term income was perhaps to buy farmland. That’s not the case today.
"Farmland investment is almost bending backwards."
As an annuity, land at $10,000 per acre with an average corn yield of 200 bu. costs $150 per acre, Swanson says. Land’s share equals 33%, so you trade the $10,000 price tag for that 33% or 66 bu. per acre for the investment, moving forward.
"If corn prices are $8 per bushel, that’s a very good investment," Swanson says. "You get your money back quickly. But if corn prices are $4 per bushel, it takes about 40 years to get your $10,000 back."
With increasing land prices and decreasing crop prices, Swanson sees a better way. He suggests boosting yields and making improvements to land you already own. For example, with tiling costs of $900 per acre, the cost of an annuity to boost productivity by 15 bu. per acre is $60 per bushel versus $150. "It’s about bushels, not acres," he says. "Today, tiling is a better trade."
Let’s take a different look: $10,000 per acre land that yields 200 bu. per acre corn costs $2.50 per bushel for a 5% return and $3 per bushel for a 6% return, explains Mike Boehlje, Purdue University ag economist. That leaves little to cover all other costs using December corn futures for the next three years. The numbers are even more stark with land at $15,000 per acre. Per-bushel land costs for corn are $3.75 for a 5% return and $4.50 for a 6% return.
For producers who believe they need to purchase land, buying less productive and less expensive land for improvement might be better for your bottom line than buying the highest-quality land at what could be the top of the market, Boehlje says.
Unlike farmland values, land improvement costs have not increased much in recent years. That’s because so much competition exists among dealers, in contrast to land sellers. "Farmland investment is almost bending backwards," Swanson says.
Source: Wells Fargo
Degree of Separation. Swanson likes land improvements, such as tiling and irrigation, because in the years ahead, the ability to manage water will likely separate those who are profitable from those who are not.
Adding 7" to 8" of water when it’s needed can boost yields from 150 bu. to 200 bu. per acre. Swanson did an eight-year calculation that showed an extra 4" to 5" of moisture applied when the corn crop needs it most is worth an additional $285 per acre in crop revenue.