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Four Insights Into Farmland Ownership
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.”