So Now You're Ready

So Now You're Ready to Look

How much land is available?  Well, if you're related to a farmer or a friend of a farmer then a lot of land is available.  I'm going to assume most of you aren't related or a friend of a farmer.  So, what does that mean for you?

Only 1% of the total amount of cropland is sold each year.  Most of that land never makes it to the market.  Why?  It's sold to family or friends of the farmer.  People living in or associated with the community the farm is located tend to get first crack at it.

This puts non-local investors at a major disadvantage in acquiring the best farmland.  Less than 1/2 of 1% of all US cropland is available for public purchase.  Which should lead you to the next question.  How do you sort this all out?  How do you access the best farmland which usually never makes it to the public market?

There are three parties to the sale.  There is the seller which can be a farmer, investor or estate.  The investor which tends to be someone from out of town looking to expand their portfolio.  And the renter who is also the farmer.  The renter is what we need to help us out.  The right renter will help you balance out all these issues.

What can that farmer do for you specifically?  Look for that in my next post. :)

Who Are the Buyers and Sellers?

Who's Selling Farmland?

That is a good question to ask.  With everything going so well, why would someone want to sell there land and who are they?  The answer makes a whole lot of sense.  Without a doubt the number one seller in today's land market is estate sells.  The land has been left to heirs and they just want to make there money on the sale and have no interest in the land.  

The second is private owners.  By this I mean investors such as yourself.  To them it's a business decision and these tend to be the easiest deals out there because, either the numbers are right and everyone's happy or they are not and no sale happens.  

The third is retired farmers looking to cash out.  This is the typical saying you'll hear in the farming industry, "Farmers live poor and die rich."

Who's Buying Farmland?

Far and away the biggest buyers in the industry are local farmers.  They tend to know in advance what land is going to be available and often buy it without it ever hitting the market.  This is one of the biggest reasons we try to utilize local farmer knowledge about what's going on in the market.  They are able to turn us onto deals before most of the general public is aware of it.  

The second biggest buyers are institutions.  Such as cooperations.  However, only some states allow.  Iowa, Kansas and Missouri do not allow big cooperations to buy cropland.

The third largest is local investors.  These are the type of clients Rural KC tends to work with.  What we do is try to use local farmer knowledge to help the local investor reach the information they have.  The best way to buy land is to buy it before it comes onto the market.  And with our network of local farmers we feel we have achieved that ability.  

Don't hesitate to call or email us at Rural KC with any questions.  Call us at 913-837-4665 or email us at info@ruralkc.com

What Could Go Wrong?

So Now You're Ready to Buy

You have everything you need.  The property you're looking at has good soils.  You have obtained the production history and that comes back strong.  The property is priced reasonably.  You have all the information you need.  What could possibly go wrong?

Not So Fast My Friend!

There still may be some hidden problems.

What Else Could Go Wrong?

You could get fooled by high rental rates.  Previous farmers could have cherry picked the history and it may include share cropping.  Not all the land may be included in the history.  The recent rental may not be typical of what that land yields.  You may be looking at numbers that only make the land look good during high commodity prices.

Other mistakes are some people don't shoot for the best farmland.  They may only buy land that is marginal.  The buyer may decide to be unrepresented forcing them to rely on the word of the seller's agent.  You may be buying land that's seems too good to be true.  Remember the old saying?  If it's too good to be true it probably is.  You could drive too hard a bargain with the farmer making it not worth the farmers time to really take care of the land.  And a common mistake is not doing a written lease.  Often farm deals are done verbally but that leaves the land owner vulnerable.  Always, and I mean always, do a written lease.

The Steps to a Successful Cropland Purchase

Steps to Success

Now that I've shown you a little of what we do.  The next step is how do we go about implementing it.  Well, there are three steps to a successful cropland purchase.  Identifying good land, look into crop insurance and find comparables.

The first step is identifying good land.  The soil maps we talked about will do that for us.  The maps will tell us soil ratings, soil types, prime farmland ratings, flood zones and much more.

The second step is looking into crop insurance.

Crop insurance can be a life saver.  It can help you avoid major problems when the crop fails.  It has been especially important in the last couple of years due to the drought which appears to be ending.  What you will find getting crop insurance is that it records historical production trends for a series of years, it reports to the USDA and new buyers are eligible for crop protections.

The final step would be to find comparables to make sure you're getting a good deal.  You can also look into state reports on recent sales.  However, state reports and comparables suffer from not being timely.  

One thing to keep in mind is land can vary greatly in the same area.  Some land slopes a lot requiring terracing.  Some land floods too frequently.  Some land just has poor soils.  Some land is just too remote.  And what I mean by too remote is it may be too far from any farmer to not make it worth farming.  You have to consider how much it money it takes for a farmer to move his or her equipment from property to property.  That is something to consider.

Farmland is a Better Investment

Farm Vs. Residential or Commercial

Some of you may be thinking, "This is all good information but I already have plenty of investments in commercial or residential.  What makes farmland a better investment?"  Let me break that down for you.

What are the down sides to investing in residential or commercial properties?  

Renters usually downgrade the property.  The property requires cash maintenance.  They are physical structures so they will decline in value.  Property taxes can be expensive.  You need liability insurance and that can be expensive.  And you have to collect monthly checks and that can be chore.  Who wants to do all that?

What makes farmland better?  

Renters will improve the property.  The farmers have a stake in the lands future.  The farmer will improve the property.  Land always rises in price thus it will physically improve over time.  Agriculture property taxes are low by law.  Liability insurance is very low too.  Finally, rent is collected once or twice a year.  No badgering and hunting down renters once a month.

Identifying Good Cropland

How To Identify Good Cropland

You've seen me write about how we are so good at identifying good cropland.  As always the most important and trustworthy identifier is the local farmer.  Without local knowledge we really would be just guessing.  But how does this all get started?  We have ways of our own to identify what is good cropland and bad.  We use a database that allows us to see exactly what type of soil is located on a property.  For example.

First we identify the land boundaries and fields.  This is example is pretty basic land.  Nothing much to it.  Ideal farmland.  Our next step is identifying the soils.

From here we can tell if this is worth passing off to have a farmer check it out.  Things that would make this look good is that it's 100% tillable based of the soil classes.  The class we see here are type 2 and 3.  The rating system goes from 1 being the best to 7 being the worst.  This also tells us what type of soil it is, how many acres are each field and percentage each field takes up of the total.  Let's see another example.  This time one that has recreation land on it.

This is an excellent example of good recreation land and farmland.  We often refer to this as mixed.  In the upper left hand corner you see nothing but timber and there's no reason to change it.  That is a poor soil class and not conducive to growing crops.  But the land that is tilled or tillable is an excellent soil class.  This property should bring in wonderful revenue.  Now the next one deals with cropland that could become development land.

What would make this one interesting is that it's surrounded by homes thus making it a prime residential development ground.  Development ground goes for much more than cropland or recreation land does.  The beauty of this one is the soil classes are excellent so while you wait for someone to offer you development prices you should be able to make an excellent income off of this.  

Finally, we take a look at what's called bottom ground.  Bottom ground is considered land on or next to a river or creek.  This is generally the holy grail of farmland.  The reason is it usually has deep soil and almost never runs dry even during a drought.  So let's take a look at one.

What we see here is close to as perfect as you will get outside Iowa, Illinois and Indiana.  All the soil classes are type 2 soils.  This should bring a high revenue of crops.  Now look at the map showing the boundaries.  See the red shaded areas?  That signifies a flood zone.  This is something to consider.  For the last three or four of years the United States Midwest has been in a drought.  So wet land like this along a creek are very attractive.  However, should a wet summer come along those areas shaded in red may flood.

Bottom land is fantastic but it's something you shouldn't only focus in on.  You need this on top of regular, dry farmland so to speak.  Consider this diversifying you cropland portfolio.  That way you should be cover irregardless of what mother nature throws our way.

These are just some of the hundreds of properties we at Rural KC keep our eye on.  We do have a new letter that would keep you up to date on all the new land that comes on to the market as well as an updated sheet on the farmland we believe is the best available.  If you are interested in receiving this new letter let us know by emailing info@ruralkc.com.

How to Make Money Off Cropland

There are many ways people get revenue off of cropland.  The most traditional way is through the annual income, such as cash rent or share crop, and land appreciation.  

Annual income can come in various different ways.  One way is cash rent.  This is usually gain by receiving bids from farmers and they tend to be competitive.  This is the way most first time investors go.  It's the simplest way and has the least amount of risk to the investor.  The second way is share crop.  This tends to be done by more experienced investors.  They are typically 1/3 2/3 shares.  The positive is the investor usually makes more money this route.  However, they are usually more involved in the day to day decision making and if the crop fails or comes in poorly they take a hit along with the farmer.  And the final way to make income is through land appreciation.  I've gone over this a lot but to summarize it, cropland averages a 6% increase in appreciation annually over the last 40 years.  And we saw a massive jump in the last two years averaging 10% to 30%.

Now for the additional streams of revenue most people don't think of.

One additional source would be mineral rights.  This pertains to everything below ground of the property.  Things such as oil and gas leases and coal are the most common.  Another one is hunting leases.  The price of a hunting lease varies from property to property and how it's decided.  For example, you can decide the lease per acre, per hunter or, if it's a wetland, it could be a wetland lease.  Sub surface water rights is also another issue to think of.  Not too big of a deal in wet areas but places like western Kansas it can be an issue.  There are also government programs in place.  There is the conservation preserve program or CRP.  That is when the government pays the land owner a yearly amount to allow the land to grow naturally.  The is wildlife habitat incentive programs or WHIP.  It's similar to CRP but instead of just leaving it alone the government creates a habitat to promote wildlife growth.  There is also wetland reserve program or WRP.  Similar to CRP.  Allows a wetland to remain untouched and promote wildlife growth.  And finally there are wind leases.

Wind leases are becoming more and more common.  The issue is you have to have your land adjacent to other turbines to tap into a wind lease.  You have to think of it like an electric grid.  And it's expensive to put in so they will only add on to wind farms and rarely put up new ones.

How to Feed the World in 2050

So now we've establish that cropland prices are rising and will continue to rise.  The question you should be asking is why.  Why does it always rise and why did it suddenly spike recently?  The main reason it will always rise is no matter what happens in the world we will always need to eat.  It's a simple supply and demand aspect.  As populations continue to grow the need for food will increase.  With the increase in need of food the price in land that produces food will rise with it.  

The next question was what caused the spike recently.  That is simple.  China and Indian have become very modernized.  The average Chinese and Indians life has improved recently.  What is the number one thing people change when their financial life improves?  Food.  For example, think back to your college days.  What did you eat?  Whatever's cheapest right.  Now look at what you eat today.  You generally eat what you like and what tastes good.  That exact same thing is happening in China and India today.  No longer are they just eating basic things like rice.  Now they are eating beef and pork.

Now let's go back to the growing population.  The amount of people in the world has grown and will continue to grow.  However, the amount of land that can produce food will not grow and will stay the same.  As a matter of fact, only 14% of the worlds land is arable.

So the amount of arable land per person has dropped dramatically.  That's a scary and sobering picture.  The following chart displays the amount of available land per person from 1750 to 2050.  How are we to fix this problem?

China, which is the world's second biggest corn consumer after the United States, will use 47 times more corn now than it did 10 years ago.  That's an increase exceeding the entire corn crop of Brazil which is the worlds third largest producer.  According to Time Magazine, the average American consumes about 250 pounds of meat a year.  Meanwhile, the Chinese average roughly 100 pounds per year, while Indians eat only 10 pounds per year.

So how are we going to meet this demand?  We need to produce more food in the next 50 years than we did in the last 10,000 years.  By 2050 the worlds population will reach 9.1 billion people, 34 percent higher than today.  Nearly all of the population increases will take place in developing countries.  Income levels will be many multiples of what they are today.  In order to feed this larger, more urban and richer population, food production must increase by 70%.  Annual meat production must rise by 200 million tons to reach 470 million tons.

I hate to paint a stark picture but it is the truth.  The world is growing and the rate at which it is growing will only increase.  To meet the demand farm production must increase.  This creates the increase in prices of land.  Can it be done?  I think so.

How I Learned To Stop Trading And Love The Farm

How I Learned To Stop Trading And Love The Farm

I was thinking about discussing this video in depth.  It is a discussion by Stephen Diggle, founder of Vulpes Investment Management to the Global Aginvesting Conference in Singapore, China back in October 2012.  Then it crossed my mind to just show you the video.  This man is far smarter than I am and it makes for an easy post.  So sit down, enjoy and prepare to have your mind blown.