A Family Affair

 

The title of this article sounds like an old Sly and the Family Stone song, “Family Affair,” back in the 1970s, when land prices were booming and people were questioning purchases. I recently received the e-mail below from a beginning farmer in the upper Midwest regarding whether or not land should be purchased. I will put you as readers in the professor's seat and see what you think of my response to these young agricultural entrepreneurs. I will take you through the logical process in my response to this family situation.

 

The Situation

I live in near our family farm, which consists of about 1,500 acres (all owned) of corn [2]and soybeans [3]and also custom finishes about 2,000 head of hogs. In addition, my brother and I, who are in our late20s, have rented about 150 acres from an outside landlord for the past three years. We have been very profitable because we exchange labor for my father’s equipment and also do not use any income for family living expenses. My brother and I, and respective spouses, have solid non-farm wage-earning jobs that we use for our needed family living expenses, retirement savings and other investments.

We are actively looking to become more involved in the operation and would like your opinion on purchasing farmland at these high prices. Good-quality farmland in our area has sold for as high as $5,600/acre; however, it is feasible that future sales could rapidly approach $6,000/acre, or higher. I understand that good farmland always comes at a premium, it just seems like there is an extra premium these days.

Over the past four years we have passed on a couple of farms because they were always “too high.” However, with interest rates remaining low and commodity prices strong, each year seems to bring a new peak to farmland values. Given our outside income sources, low equipment/overhead costs and beginning-farmer FSA [4] qualifications, we are confident that we could each purchase 80 acres and easily make our mortgage payment. Our fear is that we would be adding too much leverage to our balance sheet and ultimately take ourselves “out of the game” if another or better opportunity comes up.

The offset to this is that we will eventually be operating the family farm and would therefore be able to spread our payment over additional acres. However, succession planning has yet to formally begin and we are not sure exactly what the arrangements will be. This is another whole topic that needs to be addressed, but with parents in their early 50s, they are not yet looking to begin the process. We are trying to help them understand that succession planning occurs well before the actual transition. Despite this, we are both confident that within five to 10 years, we will operate and manage the farm.

Given our scenario, I am very interested in your thoughts on acquiring farmland in today’s market.

 

My Response

First of all, congratulations on being interested in agriculture and being enterprising enough to combine you, your brother and your respective spouses’ employment with farming. You are on the correct pathway by using your parents’ equipment to maximize income, developing the management synergy with your brother, but also looking to the future in building retirement and savings.

Yes, land values are high, particularly good-quality land. If you both have the ability to make the 80-acre purchases of land, realize that this is a long-term investment, i.e. 20-30 years. Values may go up or down on paper, but if you have the debt servicing ability – even with difficult economic scenarios, i.e., best, average and worst case – and still are able make the payments, you may consider taking on the investment. Realize that having a working capital buffer of at least 10-20% of revenue as a counter-cyclical buffer to a depressed market or skyrocketing costs is very important.

Next, make sure you and your brother’s families maintain four to nine months of living expense in cash savings in your personal finances.

Debt service, working capital management, a sound risk-management program and a solid-relationship lender who understands agricultural cycles trump the financial leverage up to a certain point.

Realize that a major land purchase is always questionable and will take sacrifice. Is this consistent with your brother’s, spouses’ and your goals?

Finally, get mom and dad to do some transition planning as soon as possible. If you have other siblings, this is even more imperative before you acquire too much land. I commend your parents for giving you and your brother a chance to farm. They need to take the next step now to build the succession in management and proactive tax and estate planning before Uncle Sam takes all. I suggest bringing them to a seminar this winter to get to get the thought processes going because it could take one to three years to develop a plan. Good luck.

To many of you reading this column, this is a classic, challenging young and beginning farmer case. Many are working away from the farm with nonfarm revenue and building business and management expertise along with accumulating wealth. Yes, there is a bright future for American agriculture.

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]