A hot topic I’ve been hearing farmers everywhere talking
about is land prices. I’ve heard of land being bought at prices reaching into
the $20,000 per acre mark!
It does make me wonder: Where can the world use 3 to 6
billion more bushels of corn, because that’s what would have to happen to take
us to even higher land prices.
Farm revenue is driving these high prices. Average prices in
central Illinois are about $8,000 an acre. I talked with one farmer recently
about his latest land purchase — at $14,000 an acre.
I asked him why he had decided to buy, considering such a
high price. He said that he was getting a great interest rate from his bank and
didn’t see why he shouldn’t make the purchase, even though it was pricey.
Just because you have the cash and can get a low interest
rate doesn’t mean it’s necessarily a good investment. Later on, if your working
capital isn’t solid, it could be hard to pull through when that bad year comes.
Think about what could happen if, after a few big crops,
corn retraces to $4 and stays there. It’s likely that land prices also could
adjust down at that point.
Land simply can’t stay at these high prices, and it’s
probably not really worth $10,000 to $20,000 per acre anyway. You need to look
at how much you’re really making off of your land.
A formula we use in our company is that land actually is
worth about eight times the average of the last few years of gross revenue
you’ve made off of it.
For example, let’s estimate that the farmer I told you about
earlier will gross $1,500 an acre on his new land for the next couple years.
That’s an excellent return.
If you multiply that by eight, you get $12,000. That still
doesn’t add up to the price he paid for it — $14,000 an acre.
What if the value of that land goes from $14,000 to $10,000
in the next few years? Looking only at the short term can hurt us in our farm
Life tends to be more like a marathon than a sprint. Not
many runners who are winning at the 12- or 13-mile mark are the people who
actually win the race.
Are you in the business of farming for the long run? Look at
current land prices with a long-term view when you’re considering how you can
win the game.
Sky-high land prices can affect your estate when it comes to
planning the best way to pass the farm to the next generation.
On your final tax return, the IRS will fully value your land
based on the current prices in your area. This will happen regardless of what
you anticipate land prices to be, and may be different than what you
That could change how you create your legacy plan. Most
farmers tend to do a good job of making sure their farm balance sheet is up to
date. But your personal balance sheet and net worth figures may not be as
Your personal balance sheet should account for current
average farmland prices in your area when estimating your net worth. That will
enable you to capture a more accurate idea of the current value of your
You may find that you’re in a higher estate tax bracket than
you think as a result of high land prices in your area. Knowing the full value
of your estate allows you to make proactive plans to protect what you’ve worked
so hard for.
Now, you probably shouldn’t change that estimate of the
value of your estate whenever a piece of land in your area is sold. That could
get confusing and isn’t necessary.
But you do need to have a general idea of the value that
Uncle Sam would place on your estate now, so you can create the best plan based
The estate tax law situation is unclear as we head into
2013, but uncertainty about estate taxes is not a valid reason to put off
planning. It’s best to lay a plan using what we know today — and then review
that plan regularly.
Think about legacy planning as a process, not a one-time
event that you finish and then forget about.
As land values — and possibly estate taxes — continue to
soar, a strong legacy plan becomes even more important to operations that want
to keep the farm in the family. The stakes have never been higher, but you can
give the next generation a solid start in farming.