Should I Buy Farmland?

20 Apr 2021

I’m often asked by farmers and non-farmers, “How can someone afford to pay that much for land?”, or “Is it possible to pay $X, XXX per acre for land?” And often my answer back to them is, “It depends.” With recent land values on the rise, these questions are on the forefront of many people’s minds. 

Every operation or borrower we work with is different. Yes, they have many similarities, but each are unique in some way. Financial position, off-farm income, and long-term goals are all examples of differences we see amongst our members. These differences are key factors used to evaluate the feasibility of purchasing land. Below are a few items we often discuss and review with our members during a land purchase.

First, we need to decide how much the borrower is willing to spend to own a piece of property. With many land purchases in the seven figures, borrowers need to be comfortable adding this amount of debt to their operation. Often, a land purchase may limit one’s ability to make any significant capital purchases in the near future, which needs to be taken into consideration.

Second, a loan structure needs to be established. The length of a loan is determined based on affordable payment amounts. The timing of payments are then set to match when income will be received. In addition, we may explore partner financing options such as joint loans through the Farm Service Agency (FSA) or Rural Finance Authority (RFA), if applicable.

Third, collateral for the loan will be required. Determining which parcel(s) of land will be pledged as security depends on the appraised value of the property as well as the size and length of the loan. 

Last, but most certainly not least, the borrower needs to show the ability to repay the loan. An analysis is completed using the borrower’s financial information. This analysis includes a realistic projection to determine if the borrower has the repayment capacity to service all debt obligations - both existing plus new. A borrower needs to know and understand the impact to one’s overall land costs and break-evens.

History has shown that purchasing farmland has been a good long-term investment. Like the stock market, there will be ups and downs in values along the way. However, over a long period of time, farmland is an asset that has consistently appreciated in value while also offering the owner the ability to generate income. 

Just remember there is never a standard “right” or “good” price for farmland. What’s “right” or “good” for you may be different for someone else. Of course, everyone wants to pay as little as possible for land. However, paying more per acre for farmland of similar quality than someone else doesn’t mean you overpaid. If one can afford the purchase, and it makes sense for their situation, they paid the “right” amount. There are many items to consider when purchasing land and many factors that contribute to the final price. In many cases, these factors carry an inherent value that cannot be calculated on paper. 

If the opportunity arises and you’re looking at buying land, be sure to contact your AgCountry loan officer to help in this important decision that is unique to each operation. 

Written By: Ross Hebrink
VP Loan Officer - Willmar