Owning land is often a better business than farming it, at least as long as land values continue to appreciate.
Grain farmers and cow-calf operators might think they’re in the business of raising crops and cattle, but when it’s time to sell the operation or pass it to the next generation, most of the value of the farm is often in the land itself.
If you’re renting a bunch of farmland, as many large operators do, it can be a great money maker when everything goes well. However, rental payments can sting when the weather and/or grain prices conspire against you. Owning the land provides a buffer against the poor years.
Other sectors don’t have the inherent advantage of land ownership.
Feedlot operations may own land for growing forage and spreading manure, but many of the larger feedlots buy a great deal of their feedgrain. Feedlots have been badly squeezed in recent times, racking up large losses on every animal they sell. Appreciation of their land base value is rarely great enough to counterbalance the large losses.
The situation is even more acute in the hog business, which is now dominated by a relatively small number of very significant players. These are the survivors after more bad years than good ones over the past couple decades.
However, there are some small to mid-sized hog operations across the country that soldier on, and many of these have survived because the hog operation is part of a farm with a significant land holding.
Hutterite colonies would be prime examples. Losses on the hogs are not enough to overwhelm the positive returns from all the other enterprises on the colony.
“I’ve never lost money on my hogs,” a farmer once told me, “but I have grown some very cheap barley for those hogs.”
Lenders like land (as well as supply management quota) as collateral, and you can’t blame them. What is an aging hog barn worth when hog returns are poor? How easy would it be for a bank to recoup loan losses on a foreclosed feedlot? However, land values just keep going up, and there are lots of interested buyers whenever parcels become available.
Of course, what goes up can come back down again.
Land values did drop steadily in many regions of the Prairies from the early 1980s to the early 1990s, during the era of extremely high interest rates.
That correction now seems like ancient history. For a younger generation of farmers, land only increases in value. If you think the price is too high, wait a year and the price will be even higher.
History has a way of repeating itself, and there have been warnings for years that land prices are a bubble about to burst and that interest rates would eventually march higher. Anything is possible, but gradual corrections seem more plausible that anything dramatic.
The big year-over-year increases in land values may be history. Net worth may not be powered higher year over year by double digit land value increases, but dropping land values seem unlikely in the near term.
Since interest rates can’t go much lower, it’s reasonable to expect them to eventually rise, and that would have a direct impact on the money available to buy farmland. However, given the economic situation of the country, few are expecting a significant interest rate increase any time soon.
Owning land is still a great business.