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Senior Advisor

Re: Would u pass on the farm?

for me pulling the trigger comes down to location and can I swing it

 

one tract is only 50% tillable, but is dang good dirt.  this farm had our highest yielding bean and corn number this year.  the remainder of the tract has additional merits that played into the decision too.

 

another tract is 85% tillable now, will be 90% plus when dozer work is finished.  its average hill ground but it too has some things going for it later on.

 

as for premium, that is all relative.  I am guessing my $/ac in these farms is about 1/3 of what TIME is paying, at most 1/2.

 

but its probably thinner dirt, less tillable, worse weather pattern, and not IN!!!!!!

 

IMO I paid too much but thats how I am.  That said, they are more than paying their way so I can't argue with that.

 

there is no secret decoder ring to buying ground.  everyones situation is different.  that said there are two things IMO that can get you ahead.  You need cash or equity, and lots of it.  And always be quietly looking.  Everyone that is serious about buying ground finds their own way to make these two things happen

 

 

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Frequent Reader

Re: Would u pass on the farm?

Right now where would u want cost of production breakeven to be at for corn on a land purchase?  $3.75, $4 more, less?  Just curious where others risk level would be.

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Senior Contributor

Re: Would u pass on the farm?

We are no where close today. You better have cash or equity to subsidize
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Honored Advisor

Re: Would u pass on the farm?

Someone earlier said to try and take the emotion out of the decision.   Just my opinion, but if you take the emotion out of it, you might as well not buy it.   If your heart isn't in it, don't do it.

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Honored Advisor

Re: Would u pass on the farm?

I`m chicken shtix on risk, that`s probably why I won`t get rich but hopefully not go broke either.  I remember periods when grain farming lost money for years on end, the only thing making the cashflow positive was livestock and the government payment.

 

The way I look at it, if you buy a farm and interest rates go to 9% (don`t ask me how they could, but they might) and cash corn is $2.50 for 5 years straight...would you be in danger of going broke?  I understand that farms only come up for sale once in a generation, if you`re lucky.  But don`t fall in love with something that can`t love you back...it`s just "dirt" there`ll always be dirt for sale, maybe not next door maybe you pass on this and another better deal comes up in 2,3 years.

 

What you have to remember is those payments have to be made with "after tax dollars" taxes are going up, not down.  Imagine paying 50% tax bracket...then having to make your land payment.  Don`t mean to talk you out of it, just some things to consider before you sign the dotted line.

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Honored Advisor

Re: Would u pass on the farm?

You should get lots of different answers...

 

I have a neighbor that appears to have tolerance for very high debt to little equity.

 

I am the reverse of that after being there several decades ago. Getting too old to recover from a major mistake.

 

That being said I am going to a land auction next week... good soil only a couple acres of waste.  Under capitalized 

 

Bidders will not have a chance,  some old guys with paid off farms, grain in the bins and trash in the bank will give more than it would

 

ever cash flow for and just use it's next year's crop to help subsidize the next purchase.

 

I expect an investor to be,the high bidder though.

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Honored Advisor

Re: Would u pass on the farm?

SWmn....breakeven on the last added tract is not the way we look at it. That breakeven could easily be over $5 and still be a great investment. The whole farm is deal. It is not too tough to get below $4, a new farm should not raise the whole farm more than $.15 a bushel in our world view. If it does, it is to big of a chunk. We are below $4 including a return to land, but our costs are irrelevant to all.

 

Just doing the math, if your cost is close to $4, you will have real trouble going broke, the insurance gaurantee, coupled with ARC, coupled with declining inputs in that environment, coupled with an increasing yield curve, etc. It will just be hard to have everything go bad all the time forever...it never does in farming. (unless you listen to most conventional wisdom like grain marketing being related to cost of production...why can't land grant econ professors get this right?)

 

On the price side, the chance to sell corn around $4.80 will happen 8 out of 10 years, so there will be chances to make some money. High likelihood we get a chance to sell $5.82 corn futures every 4th year or so. Everyone had almost 2 years to sell the 2015 crop above $5.00. The chances will come.

 

Alot of grain farms, when you include public policy income, more than covered principal payments almost every year in our lifetimes. I doubt if that trend will end in a world with so many resource pressures that is also printing money like zombies. Maybe for a year or two, but like Palouse said, the long term trends are moderately higher as they have been for a millinium or so.  The carbon energy supply cost per btu is probably not going down by much (because todays price allows for zero in new drilling costs), so ethanol has room to grow as its technology improves.

 

Corn and wheat have been straight down in price for almost 36 months at this point. Not a good TIME to get bearish.

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Veteran Contributor

Re: Would u pass on the farm?

In our area land has never cash flowed with corn beans etc. and will never do so, if history is any guide

If it did there would be more buyers than sellers, so a premium has to exist to find the balance of price/value with willing buyers and sellers

The true value of land [or anything] is when a buyer and seller agree on a price and title changes hands

In our area it seems to take a minimum of 15 yrs before the land purchase price can be paid on a 25 yr note, from crops sold from that farm. Seems better yield has a lot to do with more revenue, although crop prices also increase over time, but come in a rather herky jerky fashion

I know we had some good prices in the past, but

#1 I think those 6-7-8 corn prices where not normal and extra high prices, may come along, perhaps once or twice in a farmig career. Above average/high prices will happen about as often as very low prices, so one has to have a crystal ball to estimate an average price for the next 25 yrs. The 1st 5 yrs yield and price may be the most important guessitimate

#2 I have seen a lot of high priced land purchased thinking high prices will be with us, and then, that high priced land is sold by the bank, as the buyer got over extended on cash flow and collateral

That said, every farm we have bought has been too expensive at the time, but that is the nature of farming, in this area

What I do, is think about possible future average price/yield and could this additional land purchase sink the whole ship

That has meant buying land at a slower pace, as the earlier purchases finally support a new purchase

We also look for any additional farm income that helps with the total income and expense picture

Finally, if you have a lot of land payments, then your tax bracket increases, as principal payments have to be taxed 1st before you can use it to pay the principal amount [200,000 in land payments is a lot of taxable income]

As for inflation saving the day, with increased asset values, I doubt that will pay for a farm

In our country we also can forget about our govt bailing out bad debt

Perhaps different re-payment senerios, but the lender wants his money and most likely will always want their money back

We have bought 1 farm of  high priced land, but that was an ajoining 100 acres, giving us a block of 350 workable acres adjoining our home farm [which is very hard to do in our area]. But other than that, we have stopped buyig land and concentrate on keeping what we have. We are at, what we consider, our limit of re-payments. We always look at different ways to increase farm income with different high value crops.

We may be different than some, as that involves a lot of time, risk and effort, but if it means paying for what we have, then you might have to do some things you would rather not do, or get a job in town, if you can find one.

It is always a possibility to see corn and beans go down, even more, in price and stay there for some time, so we need to be ready with plan B, which we think, may not be a bad idea

I would think land will go down, a bit in value, but not a lot, but the ability to pay, will likely be just as hard as it is today

Some things never change

Some will pay too much, vs. income and some will pay a normal market value, with the ability to make the payments

I have walked away from so many acres it makes me cry, but at the time, cash flow was an issue. It is what it is

I doubt I will ever have the money to pay cash, or a big down payment, so my thoughts may be different from some others

I have always had to use collateral to buy land, and 100% of the purchase price at that, so I do worry about sinking the entire ship

A farm [100 acres] down the road real close to us sold for 14,000/workable acre of which 80 was workable

We passed on that farm, even though we had 1st dibs to buy

It sold in less than 30 days

Too rich for our budget with an average corn yield of maybe 180 bu/acre with fresh tile installed, to add to the cost

I would rather not have to borrow for this yrs or any yrs input cost, thus this gives me some cushion, for a realy bad yr. or maybe just a slow erosion of cash, before something happens to reverse the flow of cash. So far, the cash for inputs and land payments has not gone down, but who knows what might happen.. Cash for inputs is more versitile than no cash and high land payments, when prices are low and land loses some value. May not happen, but it could happen.

At least that is the way I see it, and it is surprising how much land can be bought, safely,, over time

All you need to do is go slowly and the land ownership will happen, although it is hard to pass on a good piece of land, close to home

It is surprising how much land we have accumulated in the past 20 yrs.

A lot more than I would have thought possible 20 yrs ago.

It also helps if the wife can support the family, when times are tough, the farm pays for the house we live in and also vechicle expense, if required. One more saftey net, that comes in handy, if you are as fortunate as we are

Just my way of looking at farm land purchases. There will be as many as there are posters

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Senior Contributor

Re: I don't know your circumstances

It's not important that the land cash flow. What is important is if you can cash flow. Meaning that the farm may pay a good percentage of the needed return and you can subsidize it off of other earnings. Perhaps you can or perhaps you can't. I always figured i wanted to save some money each and every year. Why not make that saving deposit on a land contract? One day it will be paid for and be yours for the rest of your life. And you can use the income off of that land to subsidize the next purchase.

 

Be advised there is the coffee shop crowd that knows darn well you are paying too much. 20 years later you will note that they are still in the coffee shop wondering how you can afford to pay too much for that next farm. Naysayers don't accomplish much. The guys that take the risk and make the commitment and are displined to carry it through, generally do better than the guys that don't even try.

 

Make no mistake the numbers are important. So i'm not advocating a reckless gamble. But neither do I recommend that you let the pessimism stifle your objectives. Good luck!

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Senior Contributor

Re: Would u pass on the farm?

Good post Don
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