The Importance of Making Projections When Purchasing Ag Land
October 28, 2021
Owning farm and ranch land is normally a long-term decision
whether it is a producer buying the land to expand their operation or an
investor wanting to have ag real estate in their asset portfolio. Current
economic factors such as commodity prices and loan rates coupled with current
market factors such as the supply of land for sale or the number of buyers are
immediate but ever changing considerations when putting a price on farm and
ranch land.
Since ag land is a longer term investment, projections of multi-year economic
factors have to be taken into account when making purchasing and pricing
decisions. This is when it is prudent to try to project the income generated by
the land over a longer time period as it is the income that ultimately supports
the price of a real asset over time. Net income from land is simply commodity
yield times commodity price minus input expenses. All three factors in
determining income can vary widely from year to year and place to place.
One projection to consider is will the income generated by farmland be above
average, average, or below average over the next 10 plus years? The below graph
from Agricultural Economic Insights (Widmar and Gloy) provides a historical
perspective on how Net Farm Income in the US has performed over the past nine
decades. This can be useful in making general projections about the direction
of farmland income on average in the future and how that might affect land
prices now and, in the years, to come.
Next week we will discuss another longer-term consideration in pricing land
which is capitalization rates or cap rates.
Randy Dickhut
Senior Vice President - Real Estate Operations
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