One question that farmers often ask long-time ag economist David Kohl is whether they should continue to make the investment to 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 lists several critical mistakes farmers often make when they are deciding whether to buy additional farm ground. They include:
1. Purchasing "love” property. This is the land located right next door that the farmer has eyed for decades and comes on the market only 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 explains. "To make love property pay, you need working capital and a liquidity reserve. It's doable to make those properties work, but be careful.”
2. Buying a piece of land just because the initial price is cheap. "Be careful here, because the payback is the tough part,” Kohl says.
3. 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.
4. Cash gets landlocked. The farmer who puts all of his cash into land as a safe investment has to keep in mind that the cash is now "landlocked,” Kohl says. "So if you have a downturn and are forced to sell that land for 40 cents on the dollar, it doesn't do you much good.”
You can e-mail Jeanne Bernick at firstname.lastname@example.org.
- Mid-February 2010