Farmland: Time to Buy

February 28, 2012 09:26 PM
Farmland: Time to Buy

If you’ve got the cash, grab the land

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

Is it time to expand your opera-tion by acquiring land? The answer is yes, if you have the money and can handle cash flow, said Joel Hertz, chairman of Hertz Farm Management, Inc., at the Allen-
dale Ag Leaders Conference in late January.

"Farmland provides a secure investment, but you have to understand the risks," he added.

Hertz’s 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, and the gains exceeded 30% in some Corn Belt states this past year. The Federal Reserve Bank of Chicago reported that 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 track land values showed that the average value of the state’s farmland gained 32.5% in 2011 to reach $6,708 per acre.

Buoyed by Farm Income. Hertz puts higher net income for grain farmers at the top of his list of
forces that are driving land prices. 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%, Hertz said.

Biofuels, low interest rates, government payments and a limited amount of high-quality land for sale have boosted price gains, he added.

Aging Farmers and Estate Sales. The aging farm population will be an important factor in land availability in the coming years. More than 40% of current landowners are older than 70, and 48% of farm acreage is owned by individuals who are 70 or older.

Iowa State University reported that 42% of Iowa farmers plan to retire in the next five years and that 44% of those have not yet identified a successor.

"Most sales today are estate sales," Hertz added. "The kids want to divide up the money."

Investors Are Buying, Too. Farm operators are buying up to 80% of the land that sells, and the majority of the rest is going to investors.

Hertz said his company has been selling a lot of leasebacks and helping owners get a satisfactory return.

"The investor buys it. The farmer farms it," Hertz explained. "That’s a change in attitude. We didn’t used to have farmers out there looking for investors."

Although he sees strong buyer interest, he advises taking caution. "Profit margins will tighten in 2012, unless corn explodes," he predicted.

"When land comes up for sale, you have to have your income and expenses ready," Hertz advised. "Your financial records and [knowing] what you can do will give you the courage to buy."

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