Need To Be Aware Of...

Start Simple

What is it you need to be aware of when thinking about your farm management plan?  While the first aspect is simple it's something some people make way more complected than it needs to be.  You need to think about the lands profit potential.  Basically, think of the income and expenses that go into the land.  You will also have to keep in mind your relationship with the farmer.  This will impact managing the farm as a valuable asset in one way or the other.  You don't want to hover over him constantly yet you can't be an absentee owner.  Absentee owners often get taken advantage of.  I heard a saying once from a farm manger that I love.  "What makes the crops grow the best?  My shadow."

Negotiation Skills

What are your negotiation skills?  Do you enjoy this part of the process?  Do you expect fair market value for your assets?  If you answered yes to this then you should consider custom farming.  I would highly suggest looking into hiring a farm manager to handle this.  They will get you the best deal you can for a small portion of the profits.

Written Lease

How would the farm manger work up a written lease?  I'll go over a quick standard way it's done.  While each deal is different this is the basic way it's written up.  First off he would negotiate a new lease every year.  This would insure that you get most out of the land year to year.  He would secure the cash rental payments or collect up front.  He would form a lease that would protect you and the farmer.  He would guard against any subleasing.  The lease would make sure you know your farm's production capability.  And they would use studies from local universities on cash rent.  However, take them with a grain of salt.  These studies tend to be out of date by the time they become public.

Cost of Management

This is simple much like the first step but often people don't think about it.  Basically this is the difference between what the owner/farm operator thinks might be fair vs analysis of value the land brings to farming operation.  Simply put, think of it like any other business.  Most first time investors forget that it's a business and treat it differently.

Farm Management. Is It Right For You?

What are some possible expenses to think about when coming up with a management plan?  Think about the size of the field.  The reason is obvious once you give it a second.  The larger the field the larger the equipment would have to be and may be used by more than one operator at a time.  Also, think about what you want your return on investment to be.  To possibly boost that up a bit you have to think about putting back into the land as much as you take out.  If you continue to work your farm to death eventually you'll kill the soils and you won't be able to produce on it anymore.  A good farmer or a good farm management company can do that for you.

A Cash Rent Lease is Not a Management Plan!

A cash rent is simple.  Farmer farms and you get your check.  That's it.  But how do you know you're getting the most out of your farm?  What if you want to custom farm or do a share crop?  This is what a farm management company can do for you.  It can require routine soil tests and review them.  Require actual yield results each year.  They can do this through a insurance yield approach.  They will meet the operators yearly.  During those meetings the farmer and manager can create a plan for the farm including a fertilizer and herbicide plan.  The management company can stipulate who maintains improvements on the farm.  The best thing a farm management company can do for you is keep regular communication and general farm appearances.  This is very important.

Solving The Leasing Puzzle

Leasing Formula

How do you go about putting a farm lease together?  Start with these four questions.  What are the commodity prices?  Will improvements need to be made?  How productive is the land?  Is there a demand for you land?

Other Factors

You need to get an idea of what the USDA net farm income would be.  That would give you a jump start on where to begin negotiating.  And lately they've been great.  In 2011 we had the second best year for record income.  And 2012 was the third best year in record income.  Farmers generally have cash on hand which is one of the reasons most deals are cash deals and not debt driven.  You no longer have to worry about a bubble for the cropland market.  Debt to asset ratio is 10.3%.

Weather Patterns

You know that old saying in housing and commercial real estate.  What's the three most important things?  Location, location, location.  Farmland falls right into that as well.  Depending on where you were located, yields from the drought were reduced from 0% to 80%.  So if you live in an area with warm days, cool nights and steady rainfall patterns, you're looking good.  Ever wonder why Iowa is the hot bed for cropland?  It's in the sweet spot of climate and rain fall.  No other state has what Iowa has.  However, this is also the reason Iowa land is by far the most expensive in the United States.

Crop Insurance

The prices in the fall of 2012 will dictate what the prices of 2013 would be should a farmer have to use insurance.  For example, in 2012 corn was $7.50, soybeans were $15.39 and wheat was $8.78.  2013 farm finances are looking strong.  Crop Revenue Protection for 2013 is at profitable levels again.

What's Changed?

Late summer 2013 prices came in looking good.  Cash corn was $6.70 and new crop corn was $4.50.  Cash soybeans $13.30 and new crop soybeans was $11.60.  Cash wheat was $7.00.  This shows despite the rough last couple years farming is still very profitable.  Insurance prices as of July 24th of this year ar $4.80 and $12.55.  Farmland values are very strong and continue to rise as well as the return of investment.  Farmer's are sitting in a great strong cash position.  

A Farm Gold Rush Is Coming!

Farmers Are Getting Older

Are farmers getting older?  Yes they are.  Why is that?  It's not what you think.  Farmers are getting older but it's not because they have to keep working.  They are sitting on a gold mine and they know it.  Farmers are getting older because they see the prices skyrocketing.  Analysis predict at some point prices will drop back to normal rates.  Instead of raising 20% each year, in the next couple of years we should see prices raise around 5% each year.

So, what does this have to do with farmers getting older?  They see the same thing we do.  Many farmers are waiting to see where this ends.  They want to cash out at the highest possible rate they can get.  And that is coming soon.  A farm gold rush may be upon us in the next few years.  

What will that do to the market?  It should become highly competitive.  Which could spell good news for buyers.  When there is a lot of inventory in the market, sellers will compete for buyers.  That day may be coming soon.

Sounds Like a Bubble

Now I understand that this sounds familiar to some of you.  The idea of more inventory than buyers sounds a lot like the housing market bubble burst.  However, remember most farmland is being bought cash.  For a bubble like the housing market to exist you need it to be driven by debt.  And for the farmland market to crash we would have to have a global event take place like the embargo against Russia in the early 80's.

So a farmland gold rush is coming!  This I have no doubt.  Be prepared.  Be informed.  We can help you with that.  Call us at 913-837-4665 or email us at info@ruralkc.com.  Talk with one of us and get on our email alerts to stay up to date.  Don't be left behind.  Because the farmland gold rush is coming.