I received an e-mail from a recent widow whose husband had attended my seminars over the years and was a loyal follower of economic and business-management trends. She was in a dilemma over whether to sell the farm ground while the prices are skyrocketing in her area and liquidate the remaining debt, or continue to lease the farm ground.
Her question is one that I receive at least twice a month. While it is difficult to say when and how much land values will correct, other factors must be considered.
First, what will be the tax consequences – i.e. capital gains – of selling the land? I suggest that a tax analysis be done by an accountant prior to making a decision on the land.
Next, concerning the lease option, what will be the terms and duration of the contract? Will the lessees be good stewards of your assets, which represent your annuity or cash flow? What is their financial condition and ability to be sustainable, profitable producers? Highest land rent, like cheapest interest rate from a lender, can come back to bite you if the person or the institution behind the contract is not true to their word.
The other element to consider is alternative investments with returns over a decade period, not just one year. Are you comfortable investing in stocks, bonds, CDs and other paper assets, or are you more comfortable with tangible assets like land?
Another test that needs to be conducted is an asset and income sensitivity test. What are the implications if the assets decline by 25%? What happens if contracts have to be adjusted downward by 25%? Yes, the super cycle for commodities will end and adjustments will be made by both renters and landlords. After the adjustment, is the cash flow still sufficient for your needs compared to other investments?
While this is not a direct answer, it is a protocol and procedure of thinking through the decision objectively and weighing the options.
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]