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6 Tips for Securing Farmland
Each year, you are constantly barraged by companies pitching seed, chemical, fertilizer, and other agricultural inputs.
All are worthy spending decisions worth your consideration. Yet, they’re all for naught without one crucial input: land.
Of all the spending decisions you make each year, land is likely your most complicated one. Should you rent more? Rent less? Cash-rent or share-rent? If you rent, how do you gain a potential landlord’s attention or hold rented ground once you have it?
It’s not simple on the land-buying side, either. Sure, you nix the landlord portion of the land acquisition equation. Yet, you likely tie up capital that could be used elsewhere.
Following are six tips designed to help you weave your way through these tough decisions.
1. Consider your goals
Buying land means you’re free of fending off other farmers for land. Then again, you’ve tied up capital or may now be shackled to land payments for years.
If you rent land, you’re free to walk away at the agreement’s end if it doesn’t work out. Then again, part of your land base also exits in this case, and it may be land you can’t afford to lose. So which is better?
It depends on your goals, says Andrew Fansler, a Shelbyville, Indiana, farmer and real estate agent. On a strictly farming basis, Fansler believes it’s more efficient to rent land. As an investment, though, buying farmland is better.
“It won’t give you short-term bounces to make quick money,” he says. “It’s a good long-term place to be, though.”
Because the goals of the two diverge, Fansler created separate business entities for his farm’s business and farmland investments. He treats farmland strictly as an investment. Meanwhile, the farming entity handles farming expense and revenues.
Both are good options. Just make sure you recognize that goals differ, he says.
2. Realize differences exist among landlords
Landlord rental preferences aren’t always what you’d initially think. “When you first meet one landowner I work with, you’d think he’d be the first to do a flex-rent type of deal,” says Fansler. “He doesn’t. He wants 100% straight cash rent, so we reevaluate his rent every year.”
Other landlords of Fansler’s seem so far removed from agriculture that they would initially seem candidates for straight cash-rental agreements. Instead, they desire multiyear flexible cash-rent agreements, says Fansler. This flex-rent agreement combines a fixed cash rent with a flex option if yields and revenues rise above a certain point.
“They love it because they think it gives them the best value, and they don’t have to renegotiate every year,” Fansler says.
Another surprise revolves around recently retired farmers. Having recently farmed themselves, they may seem initially empathetic with a new renter’s farming challenges.
Or maybe not.
“They tend to be a little harder to get along with, especially if they expect the tenant to do things the way they used to do,” says Terry Kastens, retired Kansas State University agricultural economist who farms with family near Atwood, Kansas.
3. Mimic Charles Schwab
Firms like Schwab, Fidelity, and Vanguard all send out monthly statements that inform clients about their investments.
This transparency also applies to landlords, Fansler believes. “Landowners own highly valued assets,” he says. “If you own 200 acres valued at $10,000 per acre, that’s $2 million. Transparency is important for them to maximize efficiency of their assets.”
Granted, you don’t have to send out monthly statements. Still, Fansler advises farmers to regularly inform landowners about how crop returns stack up to their investments.
4. Be honest with landlords
The number one thing for keeping land is always being honest, says Kastens. “Fair treatment and communication are also things that matter most,” he says.
The typical landlord and tenant establish a strong relationship after just a year or two, says Kastens.
“Those relationships are almost impervious, unless the tenant or the landlord really screws up,” he says. “Land usually changes hands when somebody dies, and then it maybe gives heirs a chance to revisit the landlord-tenant relationship.”
There’s one caveat, though. Land does change hands more in the prime farmland of the Corn Belt than in higher-risk areas like western Kansas.
“There, landlords tend to be more in tune to cash rental markets,” says Kastens.
5. Know crop-share agreements are harder to value
Kastens thinks monetary value is harder to figure from crop-share rental agreements.
“There is so much more variation in crop prices,” says Kastens. “It’s hard for landlords to say what they should be getting. From the glory years of 2007 to 2012, they made money hand over fist. However, there are years where they can be making next to nothing in summer fallow-winter wheat country. If they put out money for fertilizer and have a poor crop with no crop insurance coverage, they can have a negative return. Landlords can also hold grain across calendar years, which can hide things like return on investment.
“It’s also harder to know if you are garnering a competitive return with crop-share agreements,” he adds. “In cash-rent markets, you’d say, ‘OK, I can pay 20% more than what you are paying today.’ That is a clear signal. It’s easier to understand than saying you can get a 10% higher yield than the producer farming the ground today. That’s harder to get landlords to buy into.”
6. Go the extra mile
One of the biggest mistakes that young farmers make when they first start farming is not doing things for landlords for which they won’t be compensated, says Kastens. “I am talking about doing special stuff for the landlord, like filling in eroded ditches. This is hard for young farmers, because they don’t have the money,” he says.
In the long run, though, it can strengthen loyalty between landlord and tenant, he says.
By Gil Gullickson