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Honored Advisor

Mike, Whats a farm worth?

A farm is worth what it has always been worth..... because land is the productive value and the stable value.  And technology has helped lift value at the same time as commodity values keep slumping.... at best land is holding it's own or lowering in value.

Problem is the measure of value used by those who can't see real value is the dollar. The dollar is the value most manipulated.   And what land prices really show is how terribly worthless the dollar is.    Presidents and politicians since reagan have lied continually about how there is no inflation or inflation is being held in check...... all the while a tractor goes from  50K to 250k  and a pickup goes from 20k to 60k.  Rent goes from 200 a month to 800.  on & on.... and politician after politician changes the formula to fit their lies.   Good Iowa land not long ago went for 1800 to 2500 per acre...... now its 8k to 12k......... the land is the same... no matter how you measure it ---by area, by soil samples by organic content the land is almost the same in net productive value............. even the property taxes have gone up .....not because land is worth more in productive value, but because the dollar is worth far less than it was 10 years ago.

It could be presented that land has devalued extremely because of the number of acres it takes to sustain a family, pay for its care etc.......................  Which value keeps up with inflation  -- Land or the $.  Land comes far closer to being the stable currency.

The key IMO, to farm land value ---the point that tells the tale, is from an agriculture perspective.  Can agriculture pay for the land it cannot exist without.   ---- It is the same inflation ratio if you think about it...... How many acres of farm land does it take to acquire an acre of farm land..... That number keeps rising just like the cost of a tractor.  When one acre can never pay for one acre........ when 10 acres take 30+years to pay for one acre from net earnings...... at some point the old idea of working for free to acquire a nice retirement doesn't even work anymore....   That is the day agriculture is bankrupt and you know your lifestyle has outgrown your land values.  When economies collapse it is seldom because of land values.  It is the other things we value that get out of control........ Keeping the interest low on the dollar to keep stimulating a struggling economy doesn't work for a long period of time(I did not think it would get obama through 8 years and without technology it would not have) low interest and the disincentive to save is very paracitical to an economy in the long run.  Low interest is providing farm land bidders that are not agricultural based and is proping up values even though the farmers have to outbid them to keep the land.  The moment interest goes up to 8% or 12% farmers are out of the farmland market.... and there are not enough new farmers to rent all the land.  When a retiree can get 12% return on investment and not risk the futures market(and avoid the economic squeeze farmers face), Suddenly lots of land is for sale and bidder numbers fall.   Or if this virus shakes us back to our senses and we start productive manufacturing in the US again.... so stocks show a return on investment....(and not just a speculative gain)  the money for farmland now falls back on the profitability of farming...... (so professor mikey says)

Who sets the price of land is always misstated by media also...... It is true that a few large farms still buy a majority of the land sold.  Misleading as that is, the buyer never sets the price of land.  The next to last bidder always sets the price of land.  (Obvious back in the day of real auctions-)  Today it's harder to tell if the land broker wasn't 4 of the last 5 bids.  No one enforces those truth in advertising or honesty in sales laws.  Easier to write new ones to tie our bacon too.  Auctioneering and brokering has become a very sleazy business without any supervision.

That Smith healthy Foods idea is a bit too much Hallmark channel for my value assessing, but I get the point... a couple of comments on that.  From an appraising standpoint, naturally an orchard and truck garden are going to be valued higher per acre than corn and bean land.  But when it comes to the "business conducted on the land" it may not carry much value even if it is profitable.    

It is the same issue private restraunts that are successful face when changing hands, or a repair shop, or a barber, etc......  When the Smith leaves Smith Healthy Foods there is a a loss of management cost that will be deducted from value.... It is the personal touch(marketing, sales, personality and the connection to customers) that makes the a big difference and that seldom passes with title.  Accountants might say a 50 to 60% devalue.   It is as bad as farming when the old "skunk" that had the "feel" for the process leaves...... Some value is lost and has to be rebuilt.  Not in every case but in most.

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Re: Mike, Whats a farm worth?

They used to discuss what Berkshire Hathaway will be worth when Warren Buffet goes to the great steakhouse in the sky, but as he gets older it must be thought he is passing his tricks on to a successor.  Winnebago motorhomes would get in a bit of trouble financially and ol` John K Hanson would get up give a speech to the company and after that pit stop, it was back to the races.  

https://www.nytimes.com/1996/06/29/us/john-hanson-88-executive-who-built-up-winnebago.html  

Farmland only rarely cashflows and if it ever does, you`d better buy with both hands,  Farmland is like the old "Tulip mania" though it`s story never ends.  There is too much outside money coming into farming that props land prices up, it`s seen as a giant sandbox by some that made a fortune and farm as a "hobby".  I suppose if you wanted to get into farming when you were young, but couldn`t and went into a job of sell chemicals, cars or installing granite countertops now make million$, you still have that farming bug, so you plow your mega millions into farmland, now that you can afford it. 

Enough people believe the old adage of "land, they ain`t makin` anymore of it" has  a lot to do with land prices, new hybrids one day might make Wyoming the center of the cornbelt  Smiley Happy but when that day occurs land around Riverton will be bid up to $20,000/acre by a couple boys looking mostly for a place to apply their hog manure.

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Re: Mike, Whats a farm worth?

Agreed SW, Smith Healthy Foods is an entity of its self, the land is not that business.  

 

A couple days earlier was the story on refinancing.  He thought he had to spend the money he saved so he wouldn't have to pay taxes on it. Did he ever think of paying down debt faster, if he spends enough to save that amount of taxes he is escalating debt.

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Re: Mike, Whats a farm worth?

emotion and emotional decisions are the killer.  People bought land at the Highs because of $7 corn , $15 beans , $3 cattle. 

Time to buy is now at the lows. 4 auctions in the next two weeks around me. Two by sellers/estate settlement and two by Sheriff.  The low is what it is worth.

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Re: Mike, Whats a farm worth?

RG, don`t you think land could go lower still? Commodity prices are if you`re honest breakeven now, Bad News Bears say things may never get much better.  I mean if you`re a farm kid that went to Silicon Valley sold your startup company for $500 million and now buy the oldman and brothers ground to farm (Hi Son    Smiley Happy ) there might be a day when that outside money no longer comes in to ag.   

If land had to carry it`s own weight say 3% money 30yr mortgage and a couple acres owned ground for each purchased .   $3,000/acre $90 interest $100 principle payment just rough figures but not taking into account taxes and upkeep, tile, ditches ect.  I mean if you pay over $3,000 (which you`ll have to), you better be mentally and financially prepared for sometime in the next 30 yrs that it`ll only have a going rate of $2,000/acre. 

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Re: Mike, Whats a farm worth?

of course it can go lower, and probably will to some degree.  Price point for your individual situation is the driver as to when you buy.   Some guys could make it work at the Highs of the market , but that is a small pool, and most likely they have extenuating circumstances contributing to that ability.

 

I like to buy in the lower 1/3 of a cycle and sell in the higher 1/3 of a cycle.  Not worried about hitting the rock bottom or the peak.

 

It's all local. In my locale I'm seeing what I'm seeing.  That being land is being put up for sale and not moving. 120 , 2 miles away, been on the market for a year and a half, originally posted at $1.2 mil , never got any serious sniffs........ they dropped the price to $700k , same story...... they put it on auction last week , sold for $495K. During $7 / $15 / $3 more than likely they would have sold it for at least double that. The buyer grows Hops.  Other farms in my area have brought more than that , but not much and the trend is long days on market downward on price. It comes up for sale when it comes up for sale. It works or it doesn't. Have your rules in place and don't break them.

 

one of the Sheriff sale pieces touches my biggest block. Have had my eyes on it for 20 years. Back in '12 it sold for $8250/acre. It's 75% HEL and 25% creek bottom. Would be perfect to add and run 120 pairs on. Even back then when I was flush with cash because of $3 cattle I didn't bite. The price just didn't make sense. Maybe in the next few weeks it will........... But, I know my price point , I know the background, I know that the buyer is going to be responsible for two years of unpaid property tax,  yet , I will not become emotionally charged to the point that I break my own rules. 

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Re: Mike, Whats a farm worth?

Maybe  an  outside  observation  of  what  is  anything  worth ,  the  past  few  days  -  -  -

Stock Certificates  of  oil companies,  entertainment  shipping  companies ,  airplanes  &  builders  of  them ,  has  instantly  be  re-valued  in  an  unfavorable  direction . 

Not  On  My  Watch,   favors  the  action  of   wildcat  dispersion  of  $$$$$$  to  prop  up  the  cavalier  lifestyle  of  corporate  boardroom  elites ,  with  the  grooming  of  K-Street  lobbyist  -  -  -

Conservative,  being  diluted,  to  wavering  in-cautiousness ,  to  save  face ,  while  Covid , accelerates  isolationism  at  an  accelerated  pace -  -  -

The  guessers  of  the  past  2  weeks,  professing to  hold  on,  I'm  guessing  are  wring  their  hands,  into  callous conditions -  -  - 

Will  autonomous  vehicles  &  equipment , be  your  financial  Shangri  La  destination,  a  step  back  from  the  ledge,  or  a  vortex  of  added  complication - ?   

Maybe  a  K-Street  like  atmosphere  of,  were  not  going  to  $pend  that  much, PERIOD,  would  be  a  timely  message  at  this  moment - just  say  NO ? 

C ovid P revent  P lant ,  could  have  a  '' well  timed ''  anthem  -  as  one  politician  said  in  2016,  what  have  you  got  to  loose - ? 

Scissors  beats  paper,   &  I'm  going  with  dirt,  beats  paper  -  -  -                   

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Re: Mike, Whats a farm worth?

If your in the corn belt you have a lot of commercial and "citified" investors who prop up land values and have grown accustom to their help in land values, then I can understand thinking it will always be there.  And hopefully it will.

But in fringe locations or locations where dry land crops have sub 45 bushel yields or you get 2 crops in a 3 years rotation, the math on return to investment gets real simple.  What gets humorous is when irrigation farmers take on thousands of acres of that stuff thinking their getting in cheap..... 

I am to be 69 this year....... that is a short period of time in Land years.   I am dealing with an owner I manage a section of land for.  4th generation ownership... just inherited it...... (undivided 1/3 of it).  Proud as punch and a good guy carrying on a legacy.   I ran(1964) one of the tractors who made the first trip across it since the late 1930's.  It sat idle for 34 years after the sand got so "out of control" the owners abandoned it.  In 1964 a man drove in the neighbors yard and ask for help finding this land he had traded for.  Saving those details I'll just say he helped a man feed his family and repair a car to get moved back "East" in exchange for a signed deed when he was young and began paying taxes on it.  By 64 he decided to see if he could do anything with it.  He and my neighbor, whom I occasionally worked for while in school-----they looked it over  it was 3 miles east of our spot and made a good deal.  "You farm it and see if you can make anything of it.  When you can make a profit send me a 1/4 share of it after you've recovered your expenses."  Sealed with a handshake and what would become a solid friendship.  The owner inspected progress every year on his annual pheasant hunting trips.

My families contribution has taken it to irrigated status rather that terminating the lease several years back during a dry spell.............vast improvement temporarily....... it is still poor quality land and without water will again at some point be $200/acre ground(.  It is a struggle dry land.

Been reminiscing on it this month since the new "young buck" wants to reevaluate the lease....... its a learning experience  and I get a kick out of teaching.    It's always easier on land you don't really want to end up owning. 

He will get there.   It is the "love affair" with land that creates problems.  If you can avoid that farming is fun.  RJG64ov8 puts it very well.....  That cycle selling and buying fits lots of things we face.... good advice.

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Re: Mike, Whats a farm worth?

good thoughts....

k289......

I feel very vulnerable in farming right now.  But at least there are folks who need me and I agree land management is pretty secure in shaky times...

I would hate to be in a position of high leverage and depending on tourism or the entertainment side of the family budget right now.

I think some sports folks need to reevaluate some goofy decisions quick....... Those young players are not at much risk .... probably face bigger risk in their automobile than the virus.   The fans need to make their own evaluation and I would expect the audience to be thin --- but why pass up the revenue stream of televising games when we are at home by the set anyway.... Audience will be big..

This is the result of congress persons who try to take all the risk out of life...... Life is about learning to live with risk.... and protecting us older folks is futile.  The risk ramps up pretty good without this virus.  Grandkids bring sickness to their grandparents all the time.... most of the time it is worth it.      Let the grandkids watch the games at their house.  but I am saying "how many ncaa tournaments do I have left"  I don't mind empty stands --(and would prefer no chearleaders and bands.)

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Re: Mike, Whats a farm worth?

I would be very interested in farmland sales, by state in the last 10yrs what percentage of the prices came from honest sales of grain & livestock.  And what percent came from the family owned John Deere dealership or the family seed business bought out by Monsanto for $10s of millions.

I mean it`s their money and their business if they developed a "Angry Birds phone app" that`s worth $100 million and then choose to use that windfall to purchase farmland.  But in my opinion the vast majority of 5 digit land sale prices wouldn`t have occurred if it was solely profits from ag commodity sales.