The high cost of buying the farm
Buying a piece of land isn’t as easy as it seems
Acommercial real estate agent calls a farmer, asking if there is any land for sale in the area. The farmer replies, “If there were, I wouldn’t tell you.”
This conversation happened last week.
The acquisition of cultivated acres is an often cruel, unforgiving arena, pitting f ri ends against f ri ends, neighbours against neighbours and once financially stable people against crippling, formidable debt.
Farmland is too expensive. But farmers buy it. They clamour for it. And in many areas it’s nearly impossible to find.
Many l arge- acre farmers are numb to the soaring land prices, using capital and equity from their existing operations to swallow the cost of expansion. Or, they have enough acres over which to spread their debt that the blow isn’t as painful.
Last summer, I made the opening moves on purchasing 80 acres of farmland.
Farmers have access to many avenues of financial help. Farm lenders, such as Farm Credit Canada and Manitoba Agricultural Services Corporation ( MASC), offer money, of course, but also financial planning tools, budget guides, and many other important resources.
I used these and more as I was preparing a statement for this landowner. I chatted with a Manitoba Agriculture crop specialist to get a sense of what level of debt servicing 80 acres of cropland in my area could handle, assuming commodity prices and input costs hold, which they rarely do. Farmers with more experience than I would probably say they never do.
If South America floods the market with an above average crop, then a few months later the Southern U. S. does the same, farmers in Canada would likely get hit with price decreases as well as a potentially saturated system that may or may not have capacity to purchase their product at all.
We came up with a number. Based on current input costs and commodity prices, we decided that in order for my offer to be fiscally feasible, I should play with a range of $2,500 and $3,000 per acre. Even these numbers were tight. They barely pencilled out. With these numbers, I’d be rolling the dice relying on good to great crops on that land for the foreseeable future.
At $ 3,000 per acre, at MASC’s current interest rate of 3.875 per cent, I would pay a mortgage of $15,075.14 per year.
According to Manitoba Agriculture’s estimated cost of production guide for 2016, to grow a crop of soybeans would cost the farmer about $342.37 per acre. This figure includes about $ 66 per acre for land costs. It also includes fuel, labour, and the remaining minutia of expenses required to grow food.
According to the same guide, using conservative commodity prices and yield averages, those same acres should gross $ 350 per acre, netting less than $8 per acre.
According to these calculations, adding land costs and net income, I’d have about $ 74 per acre to make these payments from. At this rate, these acres could service an annual land payment of about $5,000.
But this spreadsheet, as robust and comprehensive as it became, was divorced from reality. In many ways, it was laughable. Good, fertile land in my area can command anywhere from $7,000 to $ 12,000 per acre, requiring an annual payment of between $ 35,175.32 and $60,300.56.
My parents remember paying slightly more than $ 1,000 per acre when they were young farmers. And this number seemed formidable at the time.
Farmers able to stomach and absorb these numbers are buying up the land when it comes available. Farmers wanting to sell will put it up for tender, ensuring it goes for the highest price possible; sell to a neighbour or friend; or sell it to their farm’s successor.
Often, these deals are only heard about after the fact. They happen in secret. And the numbers behind these transactions are fodder for the coffee shop. If a farmer has his or her eye on a piece, they’ll remain mum about the opportunity.
Producers nearing retirement shake their heads when thinking about a younger generation dealing with this reality.
It will be tricky, to be sure. And for many, the solution is less about finding ways to purchase land and more about finding ways to maximize the potential of the land you currently have.
To install drainage tile on a field costs a fraction of what new cropland does in most areas. And, doing so — a process consisting of a network of perforated pipe installed below the surface of a field to keep the top layer of earth from becoming saturated with water — would allow me to potentially grow crops with a lower tolerance to moisture. And it would help manage areas with low fertility as a result of salinity issues.
At about $ 1,000 to about $1,200 per acre, drainage tile and other land maximization techniques like growing higher risk, higher payout crops may be the answer for us farmers unable to afford these formidably high prices.
I haven’t purchased the 80 acres yet. That deal isn’t done. It’s in the works. Fingers crossed.
BEFORE YOU THINK THE PENSION OPPORTUNITY IS NOW GONE, KEEP IN MIND WHERE IT HAS BEEN: IN MARCH 1990, THE FIVE-YEAR YIELD WAS 11.6 PER CENT. WE ARE STILL AT UNBELIEVABLY LOW BOND YIELDS, AND YOU ARE STILL IN A GOLDEN PERIOD FOR GETTING HUGE LUMP SUMS. (THE SOLUTION IS) MORE ABOUT FINDING WAYS TO MAXIMIZE THE POTENTIAL OF THE LAND YOU CURRENTLY HAVE.