Buying farmland: It’s still about the “business case”
February 27, 2012
In most well-run businesses, a new investment usually begins with development of a business case — a thought process that analyzes the cost of the investment, the capital requirements, the marketplace, the expected cash flow, and the return on investment.
As long as businesses are disciplined about this, they tend to succeed. The same is true of individuals. And despite all the recent national publicity about sky-high prices on farmland in the Corn Belt, buyers are still basing their purchases on a sound business case. You could see that clearly with the Murray Wise Associates auction of Central Iowa farmland on Feb. 23.
We sold the 430 acres of farmland in five tracts, with about half (220 acres) going to local farmers and the rest going to investors from the area, who will lease it to farmers and earn steady returns (likely in the 4% range) while benefiting from any further appreciation.
Yes, the buyers paid prices that were among the highest in history — an average of $9,267 per acre, with the best land going for more than $9,800 per acre. In this case, it happened to be land that Murray Wise Associates had been managing, and the family decided to take advantage of the strong market and sell into strength.
The farmers chose to expand their existing businesses — adding land that they can use to leverage their fixed costs and raise more crops for which China and other nations have a steady and growing demand.
Another smart move.
And the investors acquired an asset that will provide a better stable return than they’ll find anywhere on Wall Street.
Yet another smart move.
Winners all around.