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Farmland: 'It's Always Time to Buy'

January 26, 2012
Farmland For Sale
  

Commodity prices and outside investors have driven huge gains in farmland prices, but buying can still make sense.

Is it time to expand your operation by acquiring land?
 
"Yes, if you've got the money and if you can handle cash flow," said Joel Hertz, board chairman at Hertz Farm Management, Inc., based in Nevada, Iowa. "It's always time to buy."
 
Farmland provides a secure investment, but "You've got to understand the risks," he said at the Allendale Ag Leaders Outlook Conference Jan. 21. 
 
Hertz speaks from experience. His company manages more than 2,000 farms and provides appraisal and real estate services to buyers and sellers in a region that stretches from Minnesota and Indiana to Colorado.
 
Farm prices have been climbing since 1986, when the crisis of the early 1980s was ending, and the gains exceeded 30% in some Corn Belt states last year.
 
The Federal Reserve Bank of Chicago reported farmland prices in its district as of Oct. 1 had gained 7% in three months and 25% in one year.
 
An Iowa State University survey of real estate brokers and others who know land values showed the average value of the state's farmland had gained 32.5% last year to $6,708. Iowa State cited rising farm income as the primary factor.

 

Buoyed by Farm Income

Hertz also put higher net income for grain farmers at the top of his list of forces driving land prices. Farm revenue soared as yields trended higher and crop prices climbed.
 
Even though input costs also rose, net farm income surged. In five of the past seven years, U.S. net farm income has beat the 10-year average of $64.8 billion, and the USDA forecast for 2011 is a record-high $101 billion.
 
Strong farm balance sheets also pushed land prices up. National average debt-to-equity ratios ran as high as 30% in the mid-1980s, but now they're down to about 10%, said Hertz.
 
Biofuels, low interest rates, government payments, and the limited amount of high-quality land offered for sale have added to the price gains, said Hertz.
 
"You'll see more auctions," he said. "Why? People don't know what their farm is worth. It's a moving market."
 

Aging Farmers and Estate Sales

The aging farm population will be an important factor in land availability in coming years. Forty-four percent of current landowner are older than 70 years and 48% of farm acreage is owned by individuals 70 years or older.
 
Iowa State University reported that 42% of Iowa farmers plan to retire in the next five years, and 44% of those who plan to retire have not identified a successor.
 
"Most sales today are estate sales," said Hertz. "The kids want to divide up the money."

 

Investors Buying Too

Farm operators are buying 70% to 80% of land that sells, and most of the remaining farmland goes to investors.
 
Hertz said his company has been selling a lot of leasebacks and helps owners get a satisfactory return. 

 

"The investor buys it. The farmer farms it," said Hertz. "That's a change in attitude. We didn't used to have farmers out there looking for investors."
 
Although he sees strong buyer interest, Hertz said, "It's a time for caution. Profit margins will tighten in 2012, unless corn explodes.
 
"When land comes up for sale, you have to have your income and expense ready. Your financial records and [knowing] what you can do give you the courage to buy."

 

For More Information
Read more land news.

 

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RELATED TOPICS: Farm Business, Land, Economy

 
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COMMENTS (3 Comments)

Bear 1 - Graceville, MN
I am not a rocket scientist, but I would like to thank you for the great article. I was about to lose 320 acres out of an 1200 acre operation and had the opportunity to buy back 160 acres at what I thought was an unreasonably high price until I did the math.
When you figured in my fixed expenses over fewer acres and the low interest rates (I could lock in close to 5% for a 15yr amortization or gamble for a few yrs and only pay 3.25% int for 2 yrs) it turns out that my interest payments are less than the currently high price to try rent land if I could even find any to rent. I am in a position that I can handle the principle portion, which I look at as a forced savings account. So, for my situation I am glad I did the math. Even with the total land payment my income projections worked out better with buying this piece of land vs. losing all 320 acres! As the article pointed out, it may be the right time to buy.
9:08 AM Jan 27th
 
Bear 1 - Graceville, MN
I am not a rocket scientist, but I would like to thank you for the great article. I was about to lose 320 acres out of an 1200 acre operation and had the opportunity to buy back 160 acres at what I thought was an unreasonably high price until I did the math.
When you figured in my fixed expenses over fewer acres and the low interest rates (I could lock in close to 5% for a 15yr amortization or gamble for a few yrs and only pay 3.25% int for 2 yrs) it turns out that my interest payments are less than the currently high price to try rent land if I could even find any to rent. I am in a position that I can handle the principle portion, which I look at as a forced savings account. So, for my situation I am glad I did the math. Even with the total land payment my income projections worked out better with buying this piece of land vs. losing all 320 acres! As the article pointed out, it may be the right time to buy.
9:08 AM Jan 27th
 
Cactus - Chandler, AZ
Any smart investor buy's low and sell's high. Good farm ground will not cash flow at today's prices even if you continue rapping the ground with high tech GMO's and non-sustainable/non-rotatable practices. It does not take a rocket scientist to figure this one out. It is strictly speculation/greed. If you can sell that to a banker, the banker must be eating rocks for breakfast. Remember, what ever goes up comes down and past trends do not necessarily prove good future projectors.
9:03 AM Jan 26th
 



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