January 18, 2022

Frye: Is this winter the right time to buy land?

For most farmers, decisions about whether to buy land can be filled with emotion. As they say, “they’re not making any more of it.”

It’s true that getting new acres is one way to grow your operation. But when ground comes up for sale near you, how do you know whether it’s the right time to buy?

I’ve heard of recent auctions in the Corn Belt where land has gone anywhere from $19,000 an acre to over $20,000 an acre. Most of the land sales I’m hearing about are at least 30% to 50% higher prices than just a year ago.

As land prices are soaring, our advisers have been getting more questions from our farmer clients who have had ground come up for sale near them recently.

As I mentioned above, it can be easy for land decisions to become emotionally driven, especially if we don’t keep the right questions and considerations in mind when going through the decision-making process.

Ask These Questions

This winter, you can talk through questions like these with your farm’s leadership team and adviser and lender:

• Does it make sense for our operation to even consider buying land at these prices?

• Is the market in a bubble when it comes to land prices? Could the market be at or near the top right now?

• If interest rates are about to go up, perhaps substantially, will it be difficult in a few years to sell land for anywhere near the current prices? Right now, interest rates are still historically low, and many farmers are sitting on cash from high yields and good prices this year.

• Can these land prices get even remotely close to cash flowing unless corn and soybean prices go much higher?

• If you’re an investor, what kind of cash rent can you expect to get over the long run and not just in this high price environment?

Still Want To Buy?

If you work through these questions and find that you are still interested in purchasing a particular piece of ground, then it’s time to dig into the financials and feasibility of buying that land.

It’s smart to do a land feasibility study to see the direct impact of the potential purchase on your overall operation and its financial well-being, to uncover what that looks like before and after the purchase.

As part of the feasibility study, these two questions are key to determine:

1. Will the farm’s working capital stay in a strong position and equity stay over 50%?

2. How would a new land note fit in the operation’s debt service coverage ratio, especially if in a few years the market moves back to lower commodity prices?

Being able to answer those two questions with solid numbers is necessary information. Plan to work with your adviser and lender this winter to get the right numbers to help with decision-making in this soaring land market.

Plans For The New Year

Now is also a good time for farm leaders to be proactive with their intentions for the upcoming crop year. Ask:

1. Where are we headed? Without knowing what we’re aiming for in the future, it can be nearly impossible to prioritize what we should focus on today.

2. What’s our why? It’s also key for everyone on the farm to be clear on why the operation has these particular goals for the future and why we’re doing what we’re doing.

3. What does success actually look like? Knowing and being clear about what success looks like for your operation first means knowing that operation inside and out, including the financial numbers.

What About 2022 Grain Markets?

Another topic on farmers’ minds as we move into 2022 is marketing plans and where the grain markets may be heading into the new year. A tailored marketing plan that’s flexible with market moves is key.

Our market advisers partner with and bring education around different marketing tools. They also help farmer clients with planning and execution around marketing decisions.

Get a free two-week trial of our marketing information service, MarketView Basic, at www.waterstreetconsulting.com. Your free trial includes regular audio and video updates, technical analysis, recommendations and more.

Darren Frye

Darren Frye

Darren Frye is president and CEO of Water Street Solutions.