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The own/rent decision for beginning farmers

 

University of Kentucky College of Agriculture, Food and Environment

LEXINGTON, Ky. – One of the key issues facing beginning farmers is land access, and the own vs. rent decision is connected with this. Some beginning farmers are part of a farm family, and they are fortunate to start their farming careers with access to land. These beginning farmers must eventually deal with succession plans – how to transfer land ownership from their parents (or other older relatives). Succession plans are critical to creating sustainable farm businesses and they cover legal, tax and family issues.

 

However, many beginning farmers are not starting with the required answer to their land access question. They should not automatically buy land, but consider all of their options.

First, you don’t need to own land to be a farmer. While historical farm culture tends to associate farming with land ownership, that culture is changing for all types of farms. Many established row crop operations own less than half of their land. And many smaller scale operations rent all of their farmland.

The value of unimproved farmland is based on the productivity of the land and its investment value. Investment value can be driven by farm enterprises and demand from farmers, and it can be part of other potential uses like development. The combination of these factors increases the cost of the land. Farmers who buy land pay for both of these characteristics, which makes them land investors as well as farmers. The problem for beginning farmers is most cannot or should not put all of their scarce financial resources into buying land.

Here’s an example. A family wants to start a typical Kentucky farm with enough land for a 30 beef cow herd and 5 to 10 acres for vegetables (which would have been tobacco a few years ago). Using data from the UK Ag Econ Department 2013 Land Value Survey, conducted by Halich and Pulliam, our new farmers would expect to pay about $200 per acre to rent the cropland and $25 per acre for the pasture – a total rent of $2,875 per year. An 85 acre farm in central Kentucky would probably cost about $4,500 per acre (a total of $380,000). The mortgage payment would be $23,000 per year. To put this in perspective, the annual land payment would cost about eight times the estimated rent for a similar farm.

Buying a farm can give you security if you can afford it. By owning the asset, you can be improving your farm’s equity. The numbers quoted above are not a difference in cost, but a difference in cash flow. Rent is a cost. The interest portion of the land mortgage is a cost, while the principle part of the payment in an investment in capital.

The difference in cost and cash flow does not mean that buying land is not a good idea. The numbers are data to be used in the decision making process. Many beginning farmers struggle with cash flow. While they might want to own the land they farm, the burden of the large land payment could put them under, or force them to borrow more money for inputs, machinery and marketing costs.

Renting land raises its own issues. Can I find the land that fits my farm business plan? Can I get a long enough contract to allow me to capture the value of improvements I will make, including soil fertility? Where will I live? Is it convenient for me to get to my rental farm?

The bottom line is that the traditional model, which is that buying land is what makes a farmer, should be examined carefully. There are an increasing number of successful farmers who own none or very little land. Beginning farmers who make the decision carefully are more likely to graduate into the category of successful farmers.

This article was written by Lee Meyer, an agriculture economist in the University of Kentucky College of Agriculture, Food and Environment. The article first appeared in the November 26 edition of Economic and Policy Update.