By Teresa Opheim • Senior Fellow, Renewing the Countryside
I asked farmers and farmland owners for their thoughts on whether it is important for beginning farmers to own farmland. Their responses were diverse and thoughtful; the following contains a sampling of their feedback.
Secure land tenure
“ Land ownership must eventually be part of the package of farming, so a farmer can put up buildings and infrastructure to support production and build equity in an appreciating long-term asset.
“However, it is better to have secure land tenure of buildings and adjacent farmland (even as a rental-only situation) rather than ownership of a small acreage without possibilities of expansion down the road. We are very grateful to the family members who agreed to rent us land and a farmstead to start our farm business. We don’t have to tie up money in a mortgage on land or a house right away, so we can afford to take on the business debt of an operating loan for machinery and equipment. Our goal is to get our business established, gain skills, prove ourselves and our markets first. Someday, if we are able to buy land either down the road or across the county, we will have a track record of paying the annual rent bill on time that could help show a banker we have an ability to repay a mortgage.”
Land ownership builds wealth
“My husband and I would have a very hard time justifying buying our farm at its current appraised value. We’d also have a very hard time justifying how hard we’ve worked over the last eight years of farming if we didn’t have at least some of the wealth from the appreciation of the value of our farm. Generally speaking, farmers should probably try and buy at least some of their land, except when land prices are in an unsustainable bubble because the farmers are going to need to have their land appreciate in order to experience wealth creation.”
Don’t lock up dollars in land ownership
“In the world of row crops, I think there are strong economic reasons not to own. Many non-farm businesses don’t own their storefronts. Owning a commercial asset ties up capital that could otherwise be directed toward growing a business, buying more inventory or opening a second store. This can apply to farming as well. Let’s play with some imaginary numbers:
“Imagine if a beginning farmer rented 300 acres of ground at $250/acre ($75,000/year). Compare that to buying the same 300 acres for $6,500/acre ($1,950,000). Is the farmer better off owning or renting?
“Since cash is king in any business, without locking up dollars into land ownership, I think a farmer could rent more ground with the $1,950,000 not spent on ownership and increase their business, achieve more efficient use of equipment and produce a higher income.
“If, after a number of years of rigorous saving, that beginning farmer could afford to purchase farmland, it would seem to make more sense to purchase other ground, if he has a good partnership with a landlord on his rental ground.”
Many farms and farmers
“Our neighbor just died. His will dictated that the entire homestead (many nice barns and a good older house which had been well-maintained for at least four generations of the same family) be destroyed. This way the land was ready for development in our sprawling metro area. His kids didn’t have to make any hard decisions, as it was Dad’s wishes that everything be destroyed. So they hired the neighbor to bulldoze it all. Even the trees are gone.”
“My other neighbors used the 1031 “like-kind” exchange program (Internal Revenue Code) and traded land in Polk County [the county Des Moines is in] to developers for land in Webster and Hamilton counties in Iowa. They avoided capital gains taxes and got 5,000 acres for 500. A lot of young people in Webster and Hamilton counties who always thought that land would come available had to make new plans.”
“It is important for many small farmers to own small farms. It is what our democracy is based on, and it is the underlying foundation of our republic. It develops the type of character that has made Iowa a standout state. It also makes it more difficult to pack up and leave when the going gets tough.”
Low debt, slow growth
“As a beginning vegetable grower with no family land and little money, I don’t think it’s necessary for me to own land to be able to farm. There are many landowners who are willing to let me use their land, for free or for some sort of exchange, because they want to see it used and they want me to succeed. Many of these offers are impractical for one reason or another, but they indicate to me a general willingness to help beginning farmers without a real desire to benefit monetarily.”
“I’ve been reading Virginia farmer Joel Salatin’s You Can Farm, and in it he talks about how land ownership and the desire to find the perfect place to settle down can be a financial and emotional trap for a lot of people who want to farm. He suggests that we be more mobile in our thinking, that we not be so tied down by expensive, permanent infrastructure and retain the ability to move to a new farm. His prime example is grazing on rented land and how that can be far more profitable than buying land and grazing it.”
“Because I am not focused on buying land, I can farm in a low-debt, slow-growth way that fits my personality and abilities. I have more flexibility and less pressure. I may eventually want to buy land, but I could conceivably farm my whole adult life without buying land and still be able to have a profitable farm business.”
Land trust protects owners
“When I was on the board of a land trust, we owned the land, but any improvements were owned by the homeowner. The lease was 99 years and could be passed on to family. If the homeowner decided to leave, the lease had to go to a family in a similar situation as defined by income levels, etc. Using a land trust for a farm situation, I could have exclusive rights to the land, care for it, learn from it and improve it. I would benefit from my improvements (such as soil building and animal fencing) for my natural life. I could even pass it along to a child. If I left, I could get my improvement costs back from the new farmer. I would even know that when I died, the land would stay in trust, be restricted and benefit someone of the same criteria that I met when I started. The benefits I receive as a private farmland owner, I can also have as a land trust leasee. A land trust would not interfere with the ‘ownership’ by the farmer if the leases were done properly.”
The traditional farmer 401(k)
“Farmers should eventually be able to own at least some of their land, because it enables them to:
- Get financing from a lender for infrastructure projects (to put up a grain bin, packhouse, machine shed, etc.). The value of financing is that it enables cash-strapped farmers to spread out a big fixed asset improvement cost over many years.
- Have some security that if they put their money into an infrastructure project, they are making a safe investment (meaning, they know they can be on the property for years to come, and if/when they decide to sell the property, they may earn back some of the initial investment).
- Turn an annual fee (rent) into an investment in an asset (farmland) that generally appreciates over the long-term (the traditional farmer 401k). If you compare the cost of our market rate rent to what it would cost us to pay a mortgage on market rate farmland each year, this still holds true in most scenarios.
“More farming families ought to be reaping the benefits of land values appreciating, not fewer!”