16 Mar Farming to Financial Independence?

This post should be titled FI-arming but I don’t think the hook is catchy enough so I’ll just open with it instead so I can still sneak my play on words into my post.  In my previous post I looked into an apartment building deal in Southern Minnesota and while we were wrapping up due diligence on that deal my father in law called me and wanted me to buy a farm with him and my brother in law.  I’m all ears, why not consider buying a farm, after all he’s built one heck of a balance sheet in his farming career over the years and I’m already down there helping two weeks a year anyway.

There was an opportunity for a farm that was 80 acres just up the road from his farms, a 1 mile drive which is nothing in the farming world and he thought there was a chance we could get the land for about $7,200 per acre considering the tumultuous pricing in the corn and soybean market courtesy of a trade war between the United States (POTUS) and China.  I promise I am not going to get political as I don’t partake in the madness of those elected in office but it is remarkable to me how close government policy can hit home via a trade war being started.  I digress, onward with the metrics of the farm.

In short, if you are reading this in hopes of becoming a farmer and don’t have farm land in your family already that will be or could be passed down to you, I’d consider a different path in life unless you have a massive pile of cash laying around and if you do you probably aren’t reading this blog.  Farming is a crazy business and while I’m only married into the farm family and have been around it since the middle of 2008, I don’t understand it intimately but its not hard to see that family farms are fading and corporate farmers are buying up the land.  The result is land prices continue to drive up higher and higher, making it harder and harder for anyone to consider a startup, and it also makes it difficult for a sibling that does want to take over the farm because its too expensive to buy off their siblings.  For the most part, kids aren’t interested in taking over the farm anymore like they once were, which is sad because the work and type of work has changed so much these days and as long as you don’t have animals you can focus more on running the farm like a business and really do well for yourself.

I will say I’ve heard of a few investors out there buying farm land that also had acreage of woods on it, they purchased this for a combination of hunting land, rental income from the farmer that will rent it and work it, and then long term appreciation.  While you can buy land strictly on the prospects of rental income, you get a nice fixed rate of income each year but it isn’t like real estate where rent exceeds the mortgage, unless you put a large amount of money down to lower your overall payments.  What we were looking at was strictly a farm operation business and land investment, and my father in law was going to donate his equipment but it was up to my brother in law and I to purchase all the chemical, seed, and make payments to the land to make the farm go.  He gave us some P&L Projections to read through and I studied them deeply, it didn’t take long to understand most of it and called to ask questions on the portion I had leftover that i just didn’t understand.

He walked me through it and when we were on the same page patted me on the back via phone and said he was surprised I grasped it that well and some of his current clients don’t understand the mechanics that well and thus why they lean on him for ongoing consulting.  The numbers on this deal were snug, if corn or soybean prices dropped we’d have to pay the mortgage out of our pockets, if corn or soy beans raised we could pay all expenses and it would cash flow enough for us to kill our line of credit and use cash to operate for next years crop.  The problem is, corn and soybeans are volatile and we were going to be heavily leveraged in this deal.  Earlier I mentioned it is really hard to start up a farm and be profitable because land prices are so high, bear in mind my father in law was giving us his equipment to use at no charge other than fuel, and we were still teetering on the brink of break-even or losing money.  One of the semi-fixed costs of farming is ownership of the equipment, and while our 80 acre farm didn’t need a 325 horsepower Case IH Magnum tractor, or 12 row planter, if we wanted to do this ourselves we’d have to buy a tractor and further go into debt and make break-even more of our reality and losing money very likely.  As an outsider looking in, I’m not sure why the farmers have done this to themselves over the years.  Perhaps the bigger corporate farmers that are farming 2,500 acres or more have the means to drive up the price of land, get the acreage and lose money on it for a few years expecting it will pay off for them down the road.  There is an argument that could be made that when treating it like a business, it isn’t unreasonable to reinvest in your business knowing your investment will take a couple years to pay you back and then some. Finally of course you have the option and opportunity to pass more wealth down to your family in a tax free manner when giving farm land via the step-up basis method.  Long story short is you can gift your land upon your death to your children and they can sell it at any time for the price it is worth upon your death and pay no tax, anything above and beyond that value becomes taxable.  In any case, the price of land is crazy in Southern MN and anywhere within the corn belt.  While you can farm more affordably in other areas the affordability comes with the lessening of yields and thus you must find the balance between yield pricing, rent rates, equipment costs, and land value.

We evaluated the numbers together on this farm and reviewed some history on the farms crop yields and determined our max price would be $7,000 per acre at auction and my father in law was going to buy it no matter what at that price, then we would have the opportunity to buy it from him if we had come to the conclusion it was right for our families.  At $7,000 per acre there was certainly a chance we could go negative on the deal but we wanted to give it a go, after-all when someone gives you an opportunity for something like this and you have the means, if it makes sense you say yes and figure out the details later.

That farm sold for $8,200 an acre, which blew my father in laws mind based on the economics in play in September 2019.  We didn’t look back or feel like we missed out because we are looking for income producing assets that cash flow on paper with a conservative fall back of break even.  In the farm situation we were looking at potentially feeding the mortgage while putting in all the work, the benefit would have been in equity build up via mortgage pay down and appreciation however we thought our dollars would and could be put to better use in real estate so we didn’t feel like we missed out on the opportunity.  Later in the fall of 2019 another farm became available in even better proximity to a farm that my father in law owns, also 80 acres but this time its literally attached to a farm that he already owns.  This time we didn’t even consider it as investors not because we weren’t interested but we knew the numbers and that the numbers don’t lie, we’d break even or lose money.  My father in law bought the farm, and we dug and planted it in 2020 and by all marks it looks like it will be a fantastic farm.

It’s a fantastic farm for my father in law because he has the economies of scale working in his favor, if commodities pricing goes down, he can have other farms help carry that farm for him and the equity creation is enough for him for a year or two.  Additionally he’s able to pledge other paid off land against this new purchase to drive his mortgage interest rates to rock bottom rates to make the mortgage payments more affordable than what we had available to us as strapping young men with acceptable net worth numbers but no farming experience other than being tied to our father in laws name. He also is in a position (age) where he’s still farming making money, so he wanted to put some more to work.

The farming investing experiment was a fun one and I’ll some day own farm land as a long-term investment strategy because as my father in law always says “they don’t make more land and we feed America”.  It likely won’t ever become primary source of income for us, but it is something I do wish to pursue when we are in a better position to take on a little more risk and potentially use the power of other assets to leverage better rates to buy a nice chunk of land.  I’ll write a separate post on this at some point on how farming works these in southern MN, it’s a few weeks of running hard in the spring and a few weeks running hard in the fall.  If I was in a FI position and that was my work schedule, it would certainly free me up to work on other passion projects in-between.

Outside of those reasons, my son loves being at the farm, seeing the equipment, and spending time with family.  If we own acreage to rent out to other families, we won’t control the operation but there can be a great landlord to farmer relationship in place and still bring the family down to experience farming all it has to offer.  Who knows however, by the time we get their and own acreage my son may have zero interest in farming, but for now, its something that is on our horizon.