Let’s take a Road Warrior trip south of the Twin Cities to an AgStar Financial Services event in Lakeville, MN, where a middle-aged producer asked me the million dollar question. Yes, it was a million dollar question concerning some farmland with no development potential selling for $13,000/acre. He asked, “Should I buy land given I have been very profitable in the grain business in the last five years? Here was my response.
1. Does the land purchase fit within your guiding principles concerning business, family and personal goals?
2. Will the purchase of the land result in a return on assets first above the cost of borrowed or equity capital? In addition, will it exceed the average long-term rate of inflation, which is approximately 4%?
3. After the purchase of the land, will your working capital reserves exceed 30% of your total farm revenue? Also, is your working capital in the form of inventory protected with a risk management program?
5. Is the land purchase congruent with longer term goals, i.e. the possibility of adding new partners or family members to the business?
Whether you are 18 or 80 years old, these are some objective steps that may help take some of the emotion out of land purchase decisions. Yes, it is a bubble market in some areas, but land in agriculture is a long-term investment. Make sure you have counter-cyclical buffers in place to ride out the one or two down cycles that will occur over a 10-20-year period.
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]