Young Farmer’s Dilemma

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One observation from my Road Warrior travels is that more quality young people are exhibiting interest in agriculture as a business and career than in the past. With job prospects being low in many fields, agriculture can offer a rewarding career and lifestyle. However, there is a challenging part of the decision to enter agriculture. A recent attendee at a conference where I spoke wrote me the following email. Please read it and tell me, how would you respond?

 

Dr. Kohl,

I wanted to tell you that you are so correct in saying that we have "agflation," with high commodity prices and inflated land, in addition to high resale prices on used equipment. I am 26 years old, live in the eastern Corn Belt and am looking to expand my operation. I have wanted to take that next step and purchase some land. I have good cash flow, but land prices are so high I feel it is very foolish to purchase land. My dad tells me that my first farm should help purchase the second; I believe this is very true, but, man, how does a young person make that step without getting in over their head with debt?

This weekend I went to a farm auction. It was 32 acres, 25.5 acres tillable, and the balance in woods. I was willing to pay $115,000 or so. I could have come up with the cash, but even if I would have borrowed money for half of it at 5% interest, it would be about $5,100/year in interest on a 30-year note. That is a $200/acre payment! How does someone make money on that? I was quickly outbid, but the winning bid on this farm was $6,800/acre. It sold to a local businessman in his 70s who is most likely scared of the stock market.

This leads to the second thing you were correct on when I heard you speak. Landowners are getting older. All I have to say is that this and many other farms are most likely going to come up for sale again in the next 15-25 years. I guess I will just have to be patient and wait my turn. Thank you for your insight and support for young farmers!!

 

First, I complement this young person for evaluating the economics of the purchase before the auction to hold his discipline in the purchase decision.

Second, his dad is correct. In today's red-hot farm real estate market, one of the keys to success is to make sure the existing operation is profitable. That is, leverage those profits to use for cash down payments, additional operational cost and additional debt service. In today's market, 50% of the purchase price must be supplemented by existing profits and cash flow outside the investment.

Third, this young person is very observant. Yes, this 70-year-old is the classic neighbor next door, i.e. Mr. Rogers. Much of this land will come up for sale and lease within the next 10 years, particularly if we have down cycle. The length and depth of the cycle will determine the discount factor.

Finally, this young person is to be commended for patience, which is critical. Sometimes a little patience and forbearance can result in an opportunity. The old saying is, “When everyone else is running, you walk; when everyone else is walking, you run.”

Today, land economics in that region are analogous to a sprint or marathon runner who is being bolstered by some economic steroids domestically and abroad. Yes, the fundamental global growth is there, but it will bear watching other incentives and stimulus factors to determine if they have true strength and sustainability.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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