Risk versus stability | Buying land is ‘real world serious,’ warns expert. ‘It’s not a game.’
Opinion at a recent farm management conference was divided over whether farmers can justify buying land at sky-high prices.
Or to put it another way, can farmers justify not buying land that they need to form a coherent farming operation?
Those conflicting factors were kicked back and forth during a debate at Farm Management Canada’s annual Ag Excellence Conference, with no easy answer at the end.
“A balance of debt, equity and leasing, I think, is a really smart thing,” said Tom Eisenhauer, president of farmland investor and landlord Bonnefield.
Eisenhauer and Manitoba Canola Growers president Ed Rempel took opposing positions on whether farmers should own or lease their farmland base, but both accepted that a mix probably makes most sense for most producers.
However, their fundamental perspectives sharply contrasted.
For Eisenhauer, leasing farmland allows a farmer to be a lower-risk, better-financed producer. For Rempel, owning provides a financial cushion and stability in bad times.
“I was never that good. I needed that crutch,” Rempel, a Red River Valley farmer, said about trying to own most of the land he has farmed.
“The crutch was land that would appreciate.”
Rempel said he knows a couple of farmers who can lease most of their land and make consistently better money than other farmers. However, they are top producers who can consistently beat their neigh-bours in crop production.
For farmers who are not that good, which he said includes him, owning land is important when profits disappear and cash flow becomes a problem. Finding the money for lease payments can become a problem.
Eisenhauer said choosing to lease rather than own allows a farmer to take on less debt, have better cash flow and expand more quickly to achieve the scales of economy needed for maximum efficiency.
Borrowing money to buy a piece of land can undermine a farm’s stability.
“If the decision to buy land is increasing the risk of your farming operation, then maybe it’s time to reconsider,” he said.
Rempel and Eisenhauer also looked at retirement and succession issues from opposite ends of the same telescope.
Rempel said farmland forms the core of a farmer’s retirement capital, so being a “farmland accumulator” is one half of what a crop farmer tries to be. The other half is making a profit from growing crops.
“I bought as I could, roughly once every five years,” said Rempel.
Eisenhauer said selling land to a company like his allows farmers to turn land assets into liquid retirement capital, and their successors can afford to have long-term land leases with his company to get into the expensive business of farming.
“It’s become a much more capital intensive business,” said Eisenhauer. “It’s Bonnefield’s capital that’s going to help the older generation retire. The younger farmer still has access to that exact same land that his family has been farming for a long time.”
The burning urgency of the farmland cost issue is based on two factors:
- Farmland prices have escalated dramatically in the last 10 years.
- Crop prices have slumped to break-even levels.
Many fear a recurrence of the farmland value collapse of the 1980s, which ruined thousands of debt-heavy farmers.
How expensive is Red River Valley farmland now?
“The final number for land in the Starbuck-Dakotah-Elie area is $4,400 an acre,” said Rempel about a recent sale.
To pay for that “would be $100 an acre a year for 44 years if interest was zero.”
He said that’s a scary price, but the land he bought in that area cost him $425 per acre in 1988.
“It’s not playtime, folks. This is real world serious,” he said.
“This isn’t a game. This can be a highly lucrative deal, buying land, but it’s not a game.”