The latest on land valuation

As it is cold and snowy outside, it seems as good of time as any to look at new research on land valuations in Nebraska, South Dakota, and elsewhere.

First up is a new report from Farm Credit Services of America.  Farm Credit’s report of shows a potential leveling off of the market for farmland based upon two reports.  The first report, the Benchmark Land Values survey tracks the value of 65 farms for more than three decades.  The Benchmark shows, based upon the previous six months, the average change in valuation for Nebraska farms at 0.7% and South Dakota farms at 7.2%.  Of potential note, Iowa’s previous six month valuation shows a decrease of 2.8%.

The second report used by Farm Credit is an analysis of more than 3,500 agricultural real estate transactions in Iowa, Nebraska, South Dakota, and Wyoming.  While demand remains strong, the number of land auctions decreased from 2012 to 2013.  Some highlights from the report:

  • South Dakota unimproved cropland values have steadily increased for the last three years and are currently selling at all-time highs with premium ground bringing up to $12,000 per acre.
  • Nebraska dry cropland prices have had significant price swings over the last two years. For the fourth quarter of 2013, prices increased by 15 percent to $5,900 per acre. The price per acre for 2012 and 2013 was $5,500 on average.
  • Nebraska irrigated cropland prices continued to rise, selling at all-time highs of $8,100 per acre. Land prices increased 6 percent during the fourth quarter of 2013. For all of 2013, prices were up 4.4 percent compared to 2012.

Also released recently in the Kansas City Federal Reserve’s Agricultural Credit Survey.  The survey indicates year-to-year gains, ending in September 2013, for irrigated, non-irrigated, and ranch land.  Year-to-year valuations for Nebraska remained strong, with Nebraska showing gains of 13.1% for non-irrigated land, 20.4% for irrigated land, and 19.5% for ranch land.  Of note, the surveyed bankers anticipate a plateau of valuation at the end of 2013 and into 2014.  In other words, valuations will remain steady.

Whether the above is good, bad, or indifferent news depends upon the point of view of each farmer or rancher.  And the above certainly doesn’t capture the fluctuations in the commodities markets either.  But land valuation is something to keep an eye on heading into the 2014 season, if only to have an accurate idea for your net worth statements and, if applicable to your operation, cash rental rates.

As for beginning farmers, while valuations remain high and demand strong, a leveling of valuations may be some slightly good news.  If valuations remains stable, it is possible to plan for purchasing property without having to account for double-digit increases year-to-year.  So beginning farmers, even if you do not currently own property, keep an eye on the valuations and plan accordingly.

Maybe leasing land isn’t a bad option?

I was planning a different topic today but the release of the Kansas City Federal Reserve’s Main Street Economist Report “Financing Young and Beginning Farmers” caused me to reverse course.

Of interest to me in the report is that more beginning and young farmers are turning to lease agreements to enter farming or ranching.  This is not surprising given the economic conditions discussed in the report: higher fixed costs, higher land costs, and higher debt-to-income ratios for beginning and young farmers.  But entering farming or ranching via leasing may not be the worst idea.

First, leases allow a beginning farmer to cultivate a relationship with a landowner.  This relationship, especially if it is with an established farmer or rancher, can lead to mentoring and education for the beginning farmer.  You have the opportunity to learn from someone, ask for advice, and develop a mentor/mentee relationship.

Second, leases allow for flexibility with changing market conditions.  Leases can be drafted so the beginning farmer shares the risk with the landlord.  Thus, if the drought continues or commodity prices dip, the beginning farmer will not be locked into a debt repayment; instead, there is flexibility in the lease price if the lease is drafted to share risk.

However, even if the lease is not drafted to share risk with the landlord, a lease provides more flexibility than debt repayments.  Instead of being obligated to repay the purchase price for a parcel of land, you may be able to stagger your leases so they are renewable on different dates, allowing you to determine which parcels of land provide the most bang for your buck and let go of parcels that are not producing to your standards when the lease ends.

Third, at least in Nebraska and Iowa, there are tax programs available for landlords who rent to beginning farmers.  These tax programs can be a strong incentive for landlords to rent to a beginning farmer and beginners should consider approaching possible landlords with a lease proposal with these tax programs incorporated into the proposal.

There are risks with leases, namely that the landlord will not renew the lease.  As a result, a beginning farmer has to weigh the risks and rewards of a lease with the risks and rewards of ownership.  Keep in mind your debt-to-income ratio, especially when considering purchasing land.  Your debt-to-income ratio affects everything from whether you can obtain a loan to what interest rate will be used to whether you will qualify for future loans you may need/want, such as for machinery.  In short, beginning your operation with a lease may allow you to build up a nest egg to purchase land at more attractive terms than would be possible without the lease.

To know whether it is better for you to lease or own depends upon financial knowledge of your operation.  As discussed earlier this week, that requires good financial recordkeeping.  And to know whether you are obtaining good lease terms also requires knowledge of the income your operation generates, meaning you need good financial recordkeeping.

Need some help deciphering the above information or perhaps need some help drafting a lease or purchase agreement?  Then contact us — it is what we are here for!

Land access for beginning farmers

By far, the topic of conversation among beginning farmers is access to land.  I’ve talked to many beginning farmers about this very topic.  How, I am asked, can I obtain access to land?

Before answering that question, we should start with what we know.  According to the Kansas City Federal Reserve, Nebraska agricultural land prices for irrigated land increased 32% and non-irrigated land increased 26.8% from the previous year.  Preliminary data on Nebraska cash rent values as of February 1, 2013 tell the same tale — cash rents are up statewide, depending upon the type of land,  from 19 to 30 percent.  (Keep in mind, however, that the preliminary data is broken down by region so the numbers vary more at that analysis level.)

With the above reality, how to obtain access to land?  I can’t promise the magic bullet, but I do have some ideas:

  • Take a long, hard look at your (proposed) operation and determine how much land you need, not how much land you want.  You may be able to lease smaller parcels and obtain the land your operation needs.  This may also include considerations of geography, i.e. whether you should move if you have the opportunity to secure land.  It will also include considerations of the type of land you need and housing possibilities.
  • Search for internships and other job opportunities to gain experience and network with other producers.  Internships and other opportunities are listed and/or promoted in various locations, including Beginning Farmers.
  • Consider leases, rather than ownership, especially when building your operation.  If you know an operator, present the operator with a business proposal to lease the property.  The proposal can include utilization of programs such as Nebraska’s Beginning Farmer Tax Credit.  More information about the Beginning Farmer Tax Credit is here.
  • There are several land-matching programs out there.  The Center for Rural Affair’s LandLink program is a nation-wide program where land owners with beginning farmers.  The Center also has a comprehensive list of other land-matching programs by state and region.
  • There are websites available which list agricultural land for sale.  A Google search will find numerous resources.
  • Keep in mind various financing strategies, both for your operation and real estate.  The Farm Service Agency has a variety of financing strategies for operating loans to real estate loans.

You don’t have to in your twenties to consider these strategies.  In fact, according to the latest research, many beginning farmers (those with ten years or less experience) are between the ages of 35 and 64.  There is no reason you cannot take some time to consider what you want to farm, how you want to farm, where you want to live, and craft a long-term strategy.

There are a lot of details in this post and Legal Aid of Nebraska is happy to help you with any questions about your particular operation.  Feel free to contact us!