The author is a financial officer with Compeer Financial.
Investing in land 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.
Compeer Financial’s appraisal department monitors benchmark farms 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. Over the past 12 months, our benchmark farms have appreciated by anywhere from 4% to 22%, depending on the area.
Get set up for success
There are many considerations when investing in land. 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 when it becomes available for sale. Some purchases are funded through income from owned acres or alternative revenue streams, such as 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 management for any operation, and it is critical to have these areas in line before making a significant investment.
Production management: This is often a favorite area of focus among producers and is 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 strategies.
Financial management: This involves planning and overseeing your finances to position your operation for success. One critical aspect is building working capital, which provides flexibility and buffers against financial uncertainties.
Ideally, working capital 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 exploring potential restructuring opportunities to bolster your financial position.
How do you actively build working capital levels? Understanding your cost of production is essential. Compeer utilizes a tool called Margin Manager, which is free and accessible online (compeer.com/resources/tools) and can help formulate your cost of production. Take time to analyze your expenses so they can be managed accordingly.
Additionally, 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. Think about your family living expenses, too. 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 nonfarm income.
Marketing management: Once you have a grasp on your cost of production, use it to make market decisions that are driven by data. Compeer’s Margin Manager offers analysis charts that allow you to make mathematical marketing decisions, taking the emotion factors out of it. Utilizing contracts or implementing risk management tools such as Dairy Revenue Protection (DRP), Dairy Margin Coverage (DMC), Livestock Gross Margin (LGM), Livestock Risk Protection (LRP), and crop insurance are effective strategies to enhance your marketing success.
Review repayment options
Once you’ve optimized your three management levels and are ready to invest in land, it’s vital 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 (principal and interest) repayment at or below $2.50 per hundredweight (cwt.).
Preparation and adaptability are crucial for your next land purchase opportunity. Evaluate your operation across its three management levels to strategically position yourself for your next land investment.
