Here is what you need to know about buying farmland
July 31, 2019

Here is what you need to know about buying farmland

Buying farmland is not a decision any farmer or investor should take lightly. It is a process that requires deep understanding of the factors that give farmland its value and determine whether it can produce at a level profitable enough to make the purchase a worthy investment.

Both farmers and investors must know how they want the investment to play out in the short and long-term, too. There are also budgets involved that, if the decision is a smart one, must not be exceeded, something that could put other operations, needs and financial goals at risk.

So, before diving into a decision on whether to buy farmland, here is what you need to know about the farmland buying process - and factors to consider if you are looking for land.

Understand how farmland is valued

Farmland values have remained somewhat steady, especially in Iowa. However, they are worth watching in the future as land values may change. To understand why this may occur, buyers must have a clear knowledge of how farmland is valued.

Although many commodity prices have remained at levels below what normally is desirable, farmland value continues to withstand at least some of the uncertainty of commodity prices.

This could be because many farmers are still looking to seize ground as it becomes available, as the 2018 Farmland Value Survey from Iowa State University Extension and Outreach Suggests.

That and, according to the survey, there simply is not a lot of land being sold at the moment - so the law of supply and demand prevails. Farmers and investors looking to capitalize in the long-term simply are looking to buy land when the can.

The market for farmland is healthy

Sellers of farmland, especially in Iowa, where farmland values have remained fairly strong compared to other areas of the Midwest, are still able to draw strong offers for their land. In the Midwest, farmland prices are actually on the rise. As Successful Farming points out, money is made in the margins with farmers always on the lookout for the best deals and best ways to draw out a profit from their land.

For farmers, it’s all about location

This first point may not matter as much to investors who will look to lease the farmland they buy, but it is a very significant influence for farmers: location, location, location.

Buyers who intend to be involved in the farming of the land themselves will want to ensure that the land they are looking to purchase is close enough that accessing it won’t be a hassle or increased burden.

In some cases, as noted in Successful Farming, it may even be worth picking up land that isn’t of the highest quality if it’s nearby and within a farmer’s financial ability to purchase.

For investors, ask if farmland is productive

As for investors who may not be looking to directly farm the land they are buying, but rather lease it out to a tenant farmer, the primary question becomes how productive is the farmland in that could be purchased.

Productive farmland is a good investment, as Progressive Farmer states. Over the long haul, investors historically are bound to see returns in wise purchases.

It is simply a matter of watching for productive land tracts and keeping an eye out for cautionary signals from the market. The weakening commodity values, as Progressive Farmer notes, could be one example of an indicator to keep an eye on over time.

Know your finances

Whenever buying land is on the table, the buyer must have - and stick to a financial plan. Wallaces Farmer recommends considering what could be necessary investments, expected expenses and current crop conditions before buying land.

As always, consider how else you could use any cash on hand for future investments. Maybe purchasing more land is in fact the best route, maybe it is not.

Do the math on the purchase

Wallaces Farmer also rightly recommends creating a pro-forma cash flow. Dig into sales trends in the area and find out the expected revenue from the farmland in consideration in order to figure out how well it fits into current operations.

If the revenue from the land accomplishes your desired objectives, then it could be a smart purchase. When in doubt, though, work with a trusted farm management advisor or banker to determine how the finances pan out.

Yes, you can find a bargain

Even though land values have remained somewhat stable in today’s agriculture economy, there are still farmland bargains that can be found - if you know where to look.

Gene Johnson, writing for Successful Farming, argues that it is absolutely possible to find farmland at below-average to true bargain prices. You may just have to broaden your search - as in beyond neighboring land and even outside the state you’re in. Johnson notes that one of the major factors in looking for lower-priced farmland is keeping an eye out, as other investors and farmers are always searching for these great deals.

But here is how he suggests finding and farming those pieces of land you are able to find: Look for land that maybe requires a little more careful attention to farm. Just because it takes some extra work doesn’t mean you can’t turn a profit, Johnson points out. You should also explore all of your crop options to find what could be most profitable for a given piece of land.

Work with Cotton Grave Farm Management on your next farmland purchase

In the farm real estate business since 1960, Cotton Grave has been a long-time leader in the industry throughout Iowa, Minnesota and South Dakota. Whether looking to buy or sell farmland, Cotton Grave can assist you as you make your next land investment decision.

Our knowledgeable team maintains a thorough understanding of soil productivity and is able to project the production potential and rate of return from every piece of farm ground that we work with. This allows our experts to both market a farm effectively and analyze potential purchases for the investors we assist.

Contact Cotton Grave if you are looking to partner with experts in the farmland buying process.

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