Preparing Financially for your Next Land Investment
Farmland investment remains a significant focus in agriculture, with ongoing high-profile sales sparking widespread discussion. If you want to expand your acreage, you might be wondering how to proceed.
Our certified appraisal team keeps benchmark farms for various areas in Minnesota, Illinois and Wisconsin. By consistently appraising these farms over time, we can track trends: benchmark farms provide a stable reference point, while recent sales indicate changes in land and building values. In the past 12 months, benchmark farms have appreciated by anywhere from 4-22%, depending on the area.
There are many considerations when investing in farmland. Operations capable of expanding their acreage are equipped to invest, demonstrating confidence in their balance sheet and financial stability. Often, acquiring a certain piece of land is a once-in-a-lifetime opportunity. Some purchases are funded through income from owned acres or alternative revenue streams, such as off-the-farm, W-2 wages, additional enterprises or other business ownership. Preparation is key to enhancing your ability to invest in the next piece of land.
If you can measure something, you can effectively manage it. We frequently discuss the importance of three key levels of dairy farm management: production, financial and marketing.
- Production Management: This is often a favorite among farmers, focused on producing high-yielding, quality products. However, realizing the full potential of a high-quality product requires a strong focus on both financial and marketing management.
- Financial Management: This involves planning and overseeing your finances to position your operation for success. One critical aspect is managing working capital, which provides flexibility and buffers against financial uncertainties.
Ideally, working capital on dairy farms should be at least 15% of adjusted gross income, or $350 per cow. This liquidity serves as a safety net, allowing you to navigate risks and withstand downturns or operational challenges. If your operation faces challenges with working capital, it’s essential to identify the underlying causes. Consider leveraging current land values and explore potential restructuring opportunities to bolster your financial position.
How do you actively manage your working capital levels?
- Cost of Production (COP): It’s vital for any operation to generate revenue that exceeds the costs of producing its products. Understanding COP is essential. Our free, online Dairy Margin Manager can help formulate your cost of production. Take time to analyze your expenses so they can be managed accordingly.
- Cost Control: Make sure your capital purchases are invested in assets that enhance efficiency and productivity. Consider all associated costs when making investment decisions to understand their full impact on your operation’s cash flow. Additionally, consider your family living expenses. If you haven’t created a family living budget, we estimate around $30,000 per adult and $12,000 per child annually. Explore opportunities to supplement your family living costs with non-farm income.
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- Marketing Management: Once you have a grasp on your cost of production, it is essential to use it to make market decisions driven by data. Our Margin Manager also offers analysis charts, allowing you to make mathematical marketing decisions and taking the emotion factor out of it. Utilizing contracts or implementing farm risk management tools such as dairy revenue protection, dairy margin coverage, livestock gross margin, livestock risk protection and crop insurance are effective strategies to enhance your marketing management.
Once you’ve optimized your three management levels and are ready to invest in land, it’s crucial to carefully consider the structure and repayment of the debt involved. Align your debt structure with your balance sheet, cash flow and future plans.
Aim to keep your annual debt repayment per hundredweight (cwt) at or below $2.50*. Compeer offers a range of flexible farmland loan terms tailored to suit your operation’s risk tolerance. Our fully fixed rates provide stability amid uncertain interest rate trends, while our flexible conversion options allow you to lower your rate if rates decrease in the future. To mitigate risk, consider utilizing our split loan feature, which blends shorter rate locks with fully fixed interest rates.
**P&I/cwt: total annual principal and interest/total amounts of cwts. produced
Preparation and adaptability are crucial for your next land purchase opportunity. Evaluate your three dairy farm management levels to strategically position yourself for your next land investment.