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U.S. FARMLAND IS OWNED BY AN EXPERIENCED POPULATION. HERE’S WHY YOU SHOULD CARE.

By Bill Spiegel | Successful Farming

12/29/2016

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There’s an old joke about farmers: They don’t want to own all the land in the county – just the land that borders them. If it weren’t so accurate, that joke would be funny.

The truth is, the farmland market is competitive and expensive. The acquisition of farmland – either owned or rented – is your biggest expense and one of your greater challenges. In this economic climate, it’s even more difficult if you’re one of those younger farmers hoping to add to the operation. More than one farmland auction has ended with an experienced farmer paying cash for land while younger, less well-heeled operators simply could not compete.

How can younger folks get access to farmland? They need to understand the dynamics.

1. WHO OWNS THE LAND?

It is clear that most of the nation’s farmland is owned by older Americans. According to USDA, there are 911 million acres of farmland. A third of the acres are owned by nonfarmers; the rest are owned by farmer-operators. Of the 354 million acres of rented farmland, 50% are controlled by 7% of landlords.

There are 2 million landlords, and 87% of them are not involved in running the farm. Nearly half of them have never farmed, and 28% of them are over the age of 75.

Every generation, it seems, believes a large quantity of farmland will change hands as older folks exit the business, either by death, retirement, or estate succession. As such, the prevailing wisdom among younger farmers is that they will have ample opportunity to acquire farmland. But that’s not been the case, according to University of Illinois agricultural economist Bruce Sherrick. Each year, just 1% of the nation’s farmland turns over in a transparent market such as auctions or public listing. Meanwhile, older farmers often have succession plans in place, perhaps with a younger family member.

2. WHY IT MATTERS

Folks wanting to buy or rent farmland go about that effort in different ways. Some write letters to landowners asking for a chance to farm; others buy full-page newspaper advertisements. One farmer may distribute a prospectus touting his or her abilities, while another simply does a good job and landowners seek that person out.

No matter the method, being able to find the right contact person for the farmland – and being ready to strike at a moment’s notice – is critical. Be ready with a résumé or farm website that touts your unique abilities.

More and more, farm operations have intricate business entities such as partnerships and limited liability corporations, says David Widmar, senior research associate at Purdue University’s Center for Commercial Agriculture. Finding an owner of these operations can be difficult.

In the past, a trip to the county courthouse to sift through deeds was necessary. New tools like AcreValue simplify that work by providing ownership records and plat maps online.

If you want to expand your operation, AcreValue’s Tamir Tashjian encourages you to get aligned with landlords who control a large number of acres. “They have access to large holdings of rented land and typically are acquiring and renting out more land,” she says.

If your goal is to align yourself with an existing farmer, see if a mutually beneficial business arrangement can be struck, says Purdue’s Widmar. “Can you position yourself to help someone exit the business? Every farmer has a different goal. Some want to walk away entirely; others want to leave gradually.

“Look beyond ownership and cash rent. Structure an operating agreement to allow for transition,” he adds.

3. AG RETAILERS, TAKE NOTE

The fact that more than a third of all U.S. farmland is controlled (either owned or rented) by farmers age 65 or older should be a wake-up call to input suppliers, says Purdue’s Widmar.

Older producers tend to be loyal and conduct business face to face. “The decision-making power takes place with these older folks. But before long, someone else is going to operate the farm,” Widmar explains.

Younger producers tend to be less loyal and will shop around to find the best deal – even if it is from a provider hundreds of miles away.

4. WHAT ABOUT REITS?

Real Estate Investment Trusts, like TIAA (formerly TIAA-CREF) and Farmland Partners, Inc., are expanding their holdings at a rapid rate.

In September, Farmland Partners announced its intent to merge with American Farmland Company. The new company will hold more than 133,000 acres in 16 states, making it one of the largest real estate investment trusts in the nation. That’s after Farmland Partners added more than 30,000 acres in 2016 alone.

Meanwhile, in 2015, the asset management group TIAA raised $3 billion to grow its global farmland real estate portfolio. Small wonder, given that farmland provides a 12% annual return on investment, which beats the 9% annual return on the S&P 500.

“These businesses aren’t doing anything crazy. They’re not buying farmland on a whim,” says U of I’s Sherrick. “Plain and simple, it’s a good investment.”

 

One year ago, the agriculture industry continued to witness the decline in commodity prices. The question was, is this the end of the boom we have been living in the last seven years?  The price of farm ground was holding fairly steady and the income from the year before was still in the rearview mirror, hoping this was just a dip in prices and that prices would firm up and stay in a $4.00 trading range.   Spring of 2016 told a story of a slight decline in farm ground, however some top quality farms still sold for a solid amount.  As the planters rolled the farm sales stopped, which is typical this time of year.  In the agricultural Real Estate business, most farms were selling by auction and listings were at a minimum. We were, however, starting to see listings, which was an attempt to hold up the price of farm ground. 

 

Today as I write this, we have seen the price of commodities drop again, down to a level we have not seen since 2007.  As an agent, we are being asked the question “Where is the price of farm ground headed?”  All indicators tell us the obvious, they are heading down. This is good news for buyers bad news for sellers.  I see it this way, if you are wanting to sell land and get a good price, all indications say the sooner the better.  Many buyers still have cash in the bank and are willing to still pay a good price for good farm ground.  There is no way anyone knows what will happen. All we can go by is what the indicators are telling us as well as history.  All commodities are down; oil, scrap metal and grains. We are guessing that we are heading back to business as usual in agriculture, back to grain trading in a two to three dollar range and not a five, six or seven dollar range.  With another bumper crop coming in this fall, we will see downward pressure on prices.

 

When the time comes to sell a property, it is like a farmer selling grain, very, very few will sell at the top of the market.  Selling in a down trend is like trying to catch a falling knife.  As a seller, you have to make the decision, have an exit plan on what to do with the money and follow through.   At this point in the market, it is better to be the seller of the start on a downward trend, than to wait and be a seller at the bottom.

 

If you know anyone wanting to liquidate farm land, feel free to give me a call or email and we can visit.

 

EGeiger(web) Eric Geiger | Sales Associate

 egeiger@Mid-ContinentProperties.com

 402.334.0256

 

 

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Interview Conducted by Midlands Business Journal  |  Answers Submitted by Eric Geiger – Sales Associate

Q. What is the value of farmland today compared with the past several years? How does the value differ depending on its location and use?

A. The value of farm ground was on a steady rise until about 2013 when we started to see a slowdown of appreciation, resulting in nearly level valuations in many areas. In 2014 good farm ground was still holding strong, and farms with non-farmable areas were starting to see a slight decline. In 2015 there was a decline in some places, however, prices have remained strong for others. Overall it is being reported there is a 10 to 15 percent reduction in the value of farm ground.

One factor which played into the strength, were areas where not many farms had sold. When a farm would come up for sale, the neighborhood had the revenue to bring a strong price. Since 2007, when commodity prices started the upward movement, the agricultural communities came into a 7+ year run of really high grain prices. Usually in agriculture a one to two year run of good prices comes along, then it goes back to normal levels thereafter, never has agriculture seen a prosperous run like what we just had. Producers upgraded long overdue equipment and bought farm land because opportunity met ability, also this run was long enough to put many producers in a good financial position. This shows with some strong sales numbers we are seeing in certain markets. We have started to witness some no sale auctions, many with reserve prices that we would say are well within the range of a good price. This indicates that more buyers are starting to show a hesitation with bidding up farms.

Obviously the more usable acres a farm has the more valuable it is. Those are the farms that are holding their value. As stated earlier, any farm with non-producing acres are showing a decline in overall selling price. Pasture land has also seen an increase over the last several years, not like tillable farm ground has, but a noticeable increase.

Q. Who is buying farmland (large or small farmers)? Are they buying additional land to add to existing farms or are they buying complete farms?

A. Farmers of all sizes are purchasing ground. This increase in commodity prices has been helpful to the smaller farmers as well, as they now have the strength to be a competitive bidder in the purchase of land. Most are buying as additional land. Some entire farms have sold to one buyer, but large tracts are usually sold in multi-parcel offerings and therefore are sold to more than one buyer.

Q. How do people finance farmland? What kind of information do they need to provide to the banks?

A. Much of the farmland being purchased in the last several years has been to cash buyers. Some have used financing as more of a tool and to take advantage of the low interest rates thus keeping their working capital liquid. Most banks we have spoken with are requiring 40% to 50% down on purchasing land, this depends on the borrower’s financial strength, the quality of the land and its production capacity. The banks are still using their traditional products, such as 15 to 20 year notes, fixed and variable interest with 1, 2 or 5 year rate changes on the life of the loan.

Q. Is there anything else you’d like to add?

A. No one knows what this farm ground market is going to do, but all current indications are that it will be a softer reduction in land prices than was previously thought. If anyone is in a position to sell now is still a good time. Prices are still higher than they were 5 years ago.

harvest

Tim Graff and Matthew Penner harvesting soybeans west of Beatrice, Nebraska. Harvest is going very well and the weather has been very cooperative. Many long hours in the field have a lot of producers further along into the harvest than normal. Yields being reported to our office are substantially better than expected.

Matt and Tim

family farm

Talking about the farm can be difficult. It means talking about business, money and the future which can be scary. But it’s scarier to not talk about it and not know what the plan is. Owning farm land is special. It’s something that not everyone is blessed with in their life. However, too often we see families with huge rifts in them because of ground that was passed down to them, or if plans were not followed through with after a sudden passing. Land that your family has owned and worked for years or generations needs to be cared for.

What I’m saying is that the holiday season is a great time to start a discussion. I guess in my family it’s one of the few times of years that everyone is together and when it comes to planning everyone needs to be on the same page.

But how you might ask? How do you even begin this conversation about your farm? And isn’t everyone on the same page as I am already? Those are great questions. To start have you ever communicated your ideas to the family before? Do your children know what to expect if you pass away? If the answer is no, we understand. Those kind of things are hard to talk about. But, please take my word for it. Being proactive about planning is MUCH better than being reactive.

So, your family is all going to be hanging around after the holiday and the opportunity presents itself. How do you start the conversation?

Here is some verbiage that might help:

“In 1954 I bought my first farm from my father…  Over the years I’ve seen it grow and it has been the success of our family today. I want to talk about what we are going to do with the farm after I am gone.”

“I’ve been thinking about the farm and I was wondering how you see our farm developing over the next 20 years?”

“I want to share my ideas about the farm with you guys.”

“I was reading this article that Mid-Continent Properties wrote that brought up some good ideas…”

After you have everyone listening,

Discuss what your goals for the future farm are. Sometimes it’s easiest if everyone writes down priorities and then share them as a part of your discussion. If there are generations working together be sure to clarify the family’s expectations. Respect for the business and each other is essential for all generations involved. If you are looking to transfer the farm to different hands we suggest you work with trusted professionals to get the project started.

If you have never discussed the farm with your family this holiday could be a great time to start. And if you need some insight please call us here at Mid-Continent Properties. We would be happy to advise you in your endeavor to keep the family farm in the family.