While sales activity continued to slow in the first quarter of 2015, farmland remains in fairly solid demand. Interest rates still are attractive and land in many areas across the corn belt is generally cheaper than a year ago, when prices in several areas hit all-time highs. Some who are bullish on agriculture long-term consider this a good time to expand their operations for a future in which they foresee more consolidation and greater efficiencies in the industry.
For those weighing a land purchase, the decision starts with a realistic cash flow. Whether times are good or bad, cash flow is key to determining if you can afford to buy farmland. In today’s environment of lower commodity prices, potential buyers need to ask: How much room do I have to take on land that is unlikely to cash flow in the current grain cycle? At today’s grain and input prices, borrowers likely will need the rest of their operation to subsidize the land purchase.
The balance sheet is the next factor. Producers who plan to put cash into a land purchase – and many of today’s buyers are doing just that – need to take a hard look at what this does to working capital. Does the remaining working capital provide enough cushion if cash-flow problems develop?
Finally, potential buyers will want to consider their balance sheet equity. A producer might have low enough costs to make land bought at today’s prices cash flow. But if cash flow is tight and working capital is weak, the risk could prove too great. Ask yourself: If I leverage up my balance sheet and I have a bad year, will I still be able to get financing to keep my operation going? Will I be able to invest in a new tractor if my current one breaks down?