By Jimmy Dula, NFU Intern
Many clothing retailers don’t own their storefront, and bakeries often don’t own their kitchens. So why would farmers need to own their farmland? In any business, cash is king. Owning a large commercial asset, like farmland, ties up capital that could otherwise be used to grow a nascent business. In some cases, a land-renting farmer can lease more acres for production, purchase necessary equipment and inputs, and consequently produce higher yields than a land-owning farmer could.
However, many farm veterans say land ownership must eventually be part of a farm operation in order to obtain financing, build infrastructure, grow the farm, and build equity as a long term asset. If it is the right time for your farm operation to look into purchasing land, here are a few things to consider.
Ideally, farmland is close to your markets. For small-scale, direct-to-consumer producers, this can be challenging to achieve, as population centers and development pressure drive up the cost of land. If you’re lucky, you can find the “Goldilocks Zone,” land that isn’t too far from consumers and not too close to the city to be prohibitively expensive. On the other hand, it is best for commodity producers selling to a co-op or grain elevator to find land where the cost of transportation does not erode profits. If you’re having trouble finding land in a location that suits you, a bit of networking throughout your community could unearth property not listed publicly.
There are several government programs that finance farming operations. The U.S. Department of Agriculture Farm Service Agency (USDA FSA) offers a loan guarantee to lenders up to 95 percent against possible financial loss of principal and interest. This encourages lenders to grant loans to beginning farmers and ranchers, who may otherwise be considered high-risk borrowers. FSA offers a number of other options. Direct farm ownership loans are ideal for beginning farmers, as they require no current or previous farm ownership and provide 100 percent financing. Joint financing loans are also available, in which FSA lends up to 50 percent of the cost of the property and a commercial lender, a state program, or the seller of the farm or ranch being purchased provides the remaining value. Additionally, down payment loans, available only to beginning, female, or minority producer, partially finance the purchase of a family-size farm or ranch.
For a less traditional route, an angel investor may be willing to provide capital for a beginning operation. Land is seen as a relatively low-risk investment, as land value is typically less vulnerable to dramatic market fluctuations, and generally appreciates over time. If an angel investor secures a plot of land and establishes a lease-to-own arrangement, the remaining start-up costs for the farm could covered by an FSA microloan.
Are you a land-owning farmer or rancher? What challenges did you encounter when purchasing land? Share your thoughts in the the comment section below.