There is a lot of talk and hype about the rising price of farmland throughout North America. Farmland will always be a good investment, but in this volatile economic environment, it may be prudent to look at investing in the land you already have rather than buying more. The return could be significantly better.
We’ve had successive wet years in parts of the Corn Belt. Too much water can significantly reduce yields, increase soil erosion, cause nitrogen loss and inhibit nutrient uptake.
There are several soil and water conservation practices (some with cost-sharing opportunities) that can add to the value of your farm with competitive returns on investment.
Make it pay. Having adequate drain tile really paid off last year. On our family farm in eastern Iowa, my father invested in a Vermeer tiling machine in 1965 and my brothers and I installed nearly 70,000 tiles during a 20-year period. Although I thought we had adequate drainage this year, we made a decision to add to the existing investment. We wound up essentially pattern-tiling the whole farm.
Analyzing the yield map records convinced us to expand on the tiling success we had already achieved.
The yields were 300 bu. per acre over the tile lines, and within several rods on either side the yield would drop 100 bu. Drainage pays. Or to put it another way, lack of good drainage reduces your bottom line.
Our farm’s drainage systems are on the top end, so tiling costs less than on some farms where one would have large expenses to get adequate outlets. But a $450 to $500 per acre investment could pattern-tile a farm with good outlets for the drainage lines.
To make a tiling decision, do a few calculations to see what’s feasible for your farm. For offsetting income, I used a 12-year study by The Ohio State University. This research showed a 20 bu. to 30 bu. per acre increase in corn yields and a 7 bu. to 15 bu. per acre increase in soybean yields.
Based on that data, I assumed a 25 bu. increase for corn and a 10 bu. increase for soybeans. My grain price assumptions were $5 corn and $12.50 soybeans, both coincidentally figured to a $125 revenue increase per year.
The net present value was $185, which meant that with a 10-year payback, the cost of the investment is returned and I increase my wealth by $185 per acre in today’s dollars, assuming the opportunity cost on my investment was 10%.
By using a math calculation called Modified Internal Rate of Return (MIRR) to measure my rate of
return, I can compare different investment strategies, as long as the projects are similar in size.
The MIRR on this tiling project was 33.95%. That’s a lot better than the stock market over the past year and better than the 10% to 12% return from stocks over a long period of time.
My MIRR goal on most projects is 20%, so this investment is one of the better ones I could make. It is difficult to get that kind of return on buying farmland at current prices.
Another alternative that is gaining a lot of traction is controlled drainage investments, where the excess water is retained at certain times during the year to act as sub-irrigation in dry times and reduce the nitrates entering the surface water. Those investments show similar returns.
An increasing number of farmers are tiling rented land, and these results apply to those cases too. You can have a lease agreement where the tenant pays for the tile and if the landowner rents the farm to someone else, the remaining value of the tile is returned to the tenant, based on a 10-year amortization.
Farming has always been a risk management business. In this case, a comparative analysis leading to smart investing reduces your risk and gets you ready for the ride.
- Late Spring 2012