Only you can define the outcome of your business. Generations ago, farmers said, “I can’t control the markets and the weather.” Rolling the dice is not good enough today.
The first hurdle of success is a mental one: you cannot control things but you can manage them. This mentality is as important as the technology of your business. Success has wiped out the lessons and discipline of 20 years’ experience and education. You can anticipate patterns without having to accurately predict the correct time, price and place an event will occur.
That’s your job: to anticipate patterns.
How will your kids judge you on your management of today’s once in a lifetime bonanza? Ag banker and strategist Michael Swanson, Wells Fargo senior agricultural economist, worries that farmers are buying land at any price, at a big cost to future generations. He poses the questions below to farmers, as the stewards of multi-generation businesses. “These questions are about preserving future options, after the good times have gone,” he says. “Just as previous generations shepherded your business, ask yourself some questions to temper today’s sizzling once-in-a-lifetime environment.”
Below are Swanson’s exercises, to guide you while times are good and you can fine-tune your course.
What’s the most cost-effective way to produce another 20-40% more bushels? There are two ways: Buy more land, or increase your productivity per acre. In most cases, it makes more financial sense to invest in irrigation, tiling, conservation tactics, soil health improvements or other productivity tools that boost your productivity per-unit, given relative change in opportunities.
Revisit projects that made no financial sense when corn was at $2.50 and interest rates were higher.
Do I really want to buy a $14,000/acre of land to produce more bushels? I can probably buy future production cheaper than that from my current acres.
Can I take $1,000/acre to install irrigation and increase yields by 20-30% to grow my returns?
You could easily see 8-14% rates of return on irrigation and other yield-boosting projects, even with $5 corn and $12 soybeans.
Recognize the false signals in today’s marketplace. Ultra low interest rates, designed to stimulate housing demand, have distorted the value of all assets. That backfires by falsely causing farmers to underestimate the future cost of financing.
Yet high land prices actually motivate sellers to withhold land from the marketplace in hopes of better prices next year. So we have less supply, spiraling land prices higher yet.
This windfall, with land prices rising much faster than any other asset class, makes most land prices too high to make sense as an investment. Do you really want to chase those 120 acres next door that is finally for sale, with no limit on what you will pay?