Q&A: Should I Buy Farmland?

Land for sale
16 Apr 2024

There are a lot of factors to consider before a farmer or rancher makes a land purchase. We sat down with Market Vice President Keven Berdan to help answer the question, “Is now a good time to buy farmland?”

Keven, if someone walked through your doors today and said they’re thinking of buying farmland, where would you start with them?

KB: This topic is always weighing on the producer’s mind. I think if you asked any farmer who has bought farmland before, they’d probably tell you that buying land is often one of the most exciting and rewarding things they’ve done and in the same breadth they’d tell you it’s probably one of the most nerve-wracking things they’ve done. 

There are a lot of places we can start. Interest rates are a big factor and are on the minds of a lot of farmers right now. We’ve seen rates nearly double in recent history. Interest rate costs are typically frontloaded, meaning you pay most of the interest costs the first couple of years of the purchase. There are things that we do to mitigate the cost upfront based on the different products we offer, such as long-term fully fixed rates, adjustable rates, or variable rate products. We do have rate conversion availability, meaning that if rates do decrease over time, we can lock you in at a lower. 

Those who have gotten their start in farming over the last 15 years see today’s rates being much higher than in the last decade. How do the age and experience of the farmer play into the conversations you have?

KB: It plays a significant role. If a younger farmer comes to me, there may not be a lot of affordability of risk with their balance in purchasing something like land. I may recommend something like a long-term fully fixed rate for them because we know what they’ll pay in interest. They may pay more upfront and have a higher annual payment, but they’re also mitigating risk. Again, we would look at a rate conversion if and when rates drop in the future. 

In addition, there are great programs that we work with for first-time purchasers of land. We utilize both federal and state programs to help get a break on interest rates.

The price tag associated with farmland can be big. How do you answer the question of a fair price along with whether it will work for an operation? 

KB: Land values vary so much across our territory. What’s considered high value in my area could be seen as a steal of a deal in other areas. I think you need to start with where it makes sense from a cash flow perspective. Financial ratios, the health of the farm, and the in-farm financials are important, but it all boils down to cash flow. The way to do that quickly is to do a cash rent equivalent analysis. 

How do you do a cash rent equivalent analysis? Start with what you have to pay upfront. Then figure out your loan payment for the land purchase along with the real estate tax associated with the land. Take that amount and divide it by the tillable acres you’re getting. You can then compare that number to what local cash rents are going for. 

When you look at this number, don’t get discouraged. The cost of owning land has almost always penciled higher than cash renting land. We will then do a next-level analysis to look at your farm as a whole. Just because land doesn’t pencil out on its own, doesn’t mean it’s not a good opportunity for your farm. Spreading the cost out over your whole farm may make the purchase look more sustainable. 

Land can be generational. What should people do when land near their farm becomes available even if it comes with a higher price tag?

KB: There are efficiencies to be gained by purchasing extra acres near other land you’re already farming. It’s easier to go next door than five miles out of your way, which provides extra value to you. With purchasing land, there is an emotional side vs the numbers side. A land purchase may only come up once in a lifetime, so we need to weigh factors like proximity to your land. Another factor could be a landlord informing you that they’d like to sell. That land probably has more value to you since you’ve been farming it and know what it’s capable of producing. These factors are very important and should be considered along with the financial aspects. 

Are there any other considerations to be aware of? 

KB: A general knowledge of your own farm’s financial health is crucial for not only buying land but any large business decision. Terms to know are working capital, owner equity, and the impact of your cash flow. 

Do you have any tips for those considering purchasing farmland? 

KB: Go talk to farmers who have been around for a while. Ask them about their experience. I’m sure they’ll talk about how nerve-wracking it was and how it might not have made sense on paper, but it turned out to be a really good investment for them. 

For young or beginning farmers who haven’t been through this before, contact your trusted advisor. Even if you don’t think you’ll get the opportunity to buy, it’s still worth going through the exercise with your advisor because it will make going through the process again in the future easier. The more experience you gain from the process will allow you to capture opportunities in the future.