Can I Afford To Buy Farmland?
Farmland values have benefited from the near record low interest rates over the past 10 years by decreasing the cost of money for investors. During that same time commodity prices (particularly corn and soybeans) have also benefitted from the weak dollar because it has made our commodities a better value for foreign countries. Commodity prices also rose to record levels during 2012 through 2014 due to drought conditions affecting overall production and lowering carryover stocks. These increases in commodity prices coupled with the low interests rates created a “perfect storm” for increased demand for farmland.
One question for farmers and investors alike moving ahead is, “How much affect will an increase in interest rates have on farmland demand and prices?” More specifically, how much less should I pay for land if the interest rate climbs 1%, 2%, 3% or more? Likewise, if the dollar strengthens relative to other countries’ currencies, decreasing export demand and lowering commodity prices, how much affect will this have on farmland values?
Farmers may lack a tool to analyze different scenarios in evaluating farmland purchases over time. We have added to our website links to a couple of calculators that may help you in modeling how land values may change given different expectations. One of these is the Farmland Investment Calculator and can be found under the Resources tab on our website. Then click on Additional Resource Links.
Included in this calculator, are projections for income as you enter production inputs and different yield goals. Inputs and yields can vary significantly from farm to farm. Below is a screenshot of the annual expense page of the calculator where you can customize for your operation.
Soil Tests should be used to evaluate possible need for major crop input expenses such as lime and fertilizer and crop management which may change the profitability picture or the yield goals. You are always welcome to call upon the experts at Soil Solutions to help you answer questions you may have concerning soil tests or cropping decisions.
An additional calculator that you can access on our website is the Land Loan Calculator. This calculator is useful in comparing payment schedules as interest rates change or if you increase the principal payments each month. It can also show how the value of your land can increase over the life of your loan by putting in appreciation rates. We hope these are helpful tools in making financial decisions in the years to come. Farmland has been a good investment over time and will continue to be into the future, but it must be able to cash flow within your operation.