Anyone else own a farm?

[ls99]

My 14 acre camp does not qualify as a farm. Most of it has trees about 3 acres clear around the building, which at one time was a generator house for the mines a few hundred feet below. Now is the only place within a few miles without commercial electric. It is fully electrified by solar panels I installed, wind mill to fill in the blanks. A stream and a spring which I discovered (had been fully coverd in mud and wild roses) supplies water.

Agree with Street, there is nothing like having a bit of land and no nieghbors, but peace and quiet and wildlife.

Spent my in between school years at grandparens/uncles farm. Theirs was all subsistence farming. Learned to walk bare feet on freshly cut stalks of wheat, which were hand cut by scythe by uncles. They taught me the skills of scythe, which I use even today.

Since they took away my shoes upon arrival. Barefoot walking everywhre. Small tasks were assigned, unhook the cows' chains when cowherds horn was blown at the edge of the village. Muck out the stalls for both the cows and horses. Let the sheep out of the pen when the shephard came by, they joined the flock and peeled off to come home in the evening.

Open the chicken coop doors when the sun came up and close at sundown. Fill the trough with water from the teeter totter beamed open well.

Yes those were the learning days. The lessons learned were awesome.

A few months ago got a letter offring a pittance for the camp by some outfit in South Carolina. Sent paper back with a note in big red letters Go F... yourselves.

 

[all4j]

So to keep this fire related. How do you manage asset allocation when 80+% of your networth is in farm land?

Good question, but to get better answers would need much more detail. I’ll speak to my situation some in hopes that gives some direction. I’m in a fortunate situation & likely not typical (if there is such a thing). First, I might say I would expect the thorniest case would be if one was “land rich & cash poor”. Otherwise, there are likely ways to manage through.

I’m in the camp that one should know ‘why’ they hold a particular asset & ‘what’ role it plays in an overall portfolio. My ‘why’ is largely non-financial, but from the financial view I hold it because of its correlation to other assets as well as its long term return. Mine is an investment, not speculation. I would prefer it generate less cash than it does due to tax reasons, but that comes with the nature of the farm. So, the ‘what’ isn’t income generation, but rather steady appreciation in value that is independent of financial assets. Actually, makes estate planning easier.

A word about that here…as you can see from the varied posts, all farms aren’t alike. Some will generate more cash than others & give the producer more control on when revenue is realized than others. So for a specific case, the nature of the farm & the income needs of the owner need to be considered to answer your question. Your why & what will also differ in all likelihood from mine.

Perhaps it might be useful to think of how to address this if the asset was an equity that for some reason you couldn’t sell yet. If it were Berkshire Hathaway or Exxon or Home Depot (etc), you might have different approaches to asset allocation. Plenty of views on this. You mentioned a % of net worth & some folks do that. Others, look at only investable assets. Biggest example is do you include your primary residence? Equity portion only? You may have heard some will see their mortgage as a “negative bond”.

Someone else mentioned their farm being treated like an annuity. Works for them, but wouldn’t for me. My situation is far from that level of consistency with some years being good & others not so much (in terms of spendable cash). So, listen to various approaches & pick what works for you.

 

[ivinsfan]

all4j I was pretty clear the annunity comment would apply when we retire and have cash rent income

 

[all4j]

ivinsfan, I'm puzzled as to this latest post, but perhaps I wasn't clear. I can see in the situation where someone has steady rent checks that it might be seen as an annuity. But that isn't my situation & I feel there are likely many others that don't/wont have that. Pros/cons to each situation, but the impact on how that affects overall asset allocation isn't the same from where I sit.

Am I saying something that is in conflict with what you are saying? If so, I guess I'm missing it.

 

[street]

Some very interesting angles everyone has on owning land. In my case with owning a ranch wasn't to get financial benefit from it. I could rent it for livestock or get a income from the hay it produces. I don't do either and just let a rancher hay it and I don't ask for a dime. He does me some favors here and there and that is good by me.

I also don't own it for speculation purposes either. I own it because I enjoy that type of life and for the serenity, solitude, beauty, hunting, fishing, hiking and the joy of the outdoors.

When I owned an ag farm, I was in it to help make the payments and to make a profit. Owning land is really no different than owning a house. You don't have a home to help with financial gains. Real estate goes up and down no matter if it is a house or land. Both cost you money both can make you a dime.

I don't use net worth and my home and ranch isn't part of my portfolio.

 

[ivinsfan]

ivinsfan, I'm puzzled as to this latest post, but perhaps I wasn't clear. I can see in the situation where someone has steady rent checks that it might be seen as an annuity. But that isn't my situation & I feel there are likely many others that don't/wont have that. Pros/cons to each situation, but the impact on how that affects overall asset allocation isn't the same from where I sit.

Am I saying something that is in conflict with what you are saying? If so, I guess I'm missing it.

No I just clarified that as a nonworking rented farm we would just call it an annuity. In large part because ideally the land would pass to our heirs with a stepped up basis. The question was how do land owners see their own situation with farmland. Right now we farm so we don't consider it an annuity it has to stand on it's own to produce income. I wasn't certain you understood the particular circumstance I was referring to. No worries.

 

[ivinsfan]

Some very interesting angles everyone has on owning land. In my case with owning a ranch wasn't to get financial benefit from it. I could rent it for livestock or get a income from the hay it produces. I don't do either and just let a rancher hay it and I don't ask for a dime. He does me some favors here and there and that is good by me.

I also don't own it for speculation purposes either. I own it because I enjoy that type of life and for the serenity, solitude, beauty, hunting, fishing, hiking and the joy of the outdoors.

When I owned an ag farm, I was in it to help make the payments and to make a profit. Owning land is really no different than owning a house. You don't have a home to help with financial gains. Real estate goes up and down no matter if it is a house or land. Both cost you money both can make you a dime.

I don't use net worth and my home and ranch isn't part of my portfolio.

You mean you don't consider it as part of your portfolio..That's where we had to make a decision about SWR and counting assets.We prefer the land asset passes to the next generation. So we just look at it as an annuity after we retire and cash rent. It's not a fixed annuity obviously so can be subject to income fluctuations. You have affection for your ranch land and there is no way to put a price tag on that..

 

[KRABE]

As far income planning and spending as soon as we quit farming , we will probably segregate it off and simply think of it as an annuity. IE it's an annuity that produces X in net income every year and we need Y to live on so we simply plug that number into our annual spend. Kind of simplistic but that's how we will do it. The benefit having an annuity type income and still owning the appreciating corresponding asset is pretty sweet.

So how did/do you decide how much more to acquire? I would like to try to acquire another 80 acres a year (using leverage but putting enough down to having reasonable rent to make the payments) for the next 15 years.

I worry that this puts me extremely heavily invested in land vs other exposure but I like the tax benefits and using it as means to grow my farming operation and grow the legacy left to me by those that came before?

 

[ivinsfan]

So how did/do you decide how much more to acquire? I would like to try to acquire another 80 acres a year (using leverage but putting enough down to having reasonable rent to make the payments) for the next 15 years.

I worry that this puts me extremely heavily invested in land vs other exposure but I like the tax benefits and using it as means to grow my farming operation and grow the legacy left to me by those that came before?

That's your decision...after 49 years of farming our finances are a mix of bought land, family land purchased after passing of parents, actual working farm assets, grain growing or in the bin and retirement savings. Add in some SS and VA disability and it's a big mix. I have no advice for someone wanting to buy working farmland in this climate. But as my DH says land always seems expensive when you buy it!!! Good luck.

 

[street]

You mean you don't consider it as part of your portfolio..That's where we hawith you d to make a decision about SWR and counting assets.We prefer the land asset passes to the next generation. So we just look at it as an annuity after we retire and cash rent. It's not a fixed annuity obviously so can be subject to income fluctuations. You have affection for your ranch land and there is no way to put a price tag on that..

Correct I don't consider my home or ranch in my portfolio. If all goes as plan it will be just given to my son and family. I have already told him never to sell it unless in dire need too. If for some reason they don't want it, I want it donated to the State for public use as an archery hunt only, walk in only. 90% of the ranch you need to walk or horse back. You could get a 4-wheeler on some of it but not much.

I also agree, like your land it really is hard to put a personal price tag on it.

 

[all4j]

So how did/do you decide how much more to acquire? I would like to try to acquire another 80 acres a year (using leverage but putting enough down to having reasonable rent to make the payments) for the next 15 years.

I worry that this puts me extremely heavily invested in land vs other exposure but I like the tax benefits and using it as means to grow my farming operation and grow the legacy left to me by those that came before?

On question of how much more...I would suggest "stress testing" to project the affect of various what-ifs. What if key people become disabled? What if interest rates .... weather events .... you name it goes wrong ... Will I be ok? Impact on rest of family (spouse, heirs, etc)? If it keeps penciling out that you'll have positive free cash flow, buy it! Although I'd be skeptical that having any asset as >80% would really pencil out if objectively considering...

Maybe a risk tolerance thing for me??

 

[all4j]

Correct I don't consider my home or ranch in my portfolio. If all goes as plan it will be just given to my son and family. I have already told him never to sell it unless in dire need too. If for some reason they don't want it, I want it donated to the State for public use as an archery hunt only, walk in only. 90% of the ranch you need to walk or horse back. You could get a 4-wheeler on some of it but not much.

I also agree, like your land it really is hard to put a personal price tag on it.

I'm curious as to whether you've considered any form of conservation trust in the situation you cited about possibly donating to the state? I'm trying to learn more about those myself & it may not come close to meeting your objective. I also don't know if it matters which state it is in &/or whether there are state specific programs for these cases...any insight appreciated

 

[ivinsfan]

On question of how much more...I would suggest "stress testing" to project the affect of various what-ifs. What if key people become disabled? What if interest rates .... weather events .... you name it goes wrong ... Will I be ok? Impact on rest of family (spouse, heirs, etc)? If it keeps penciling out that you'll have positive free cash flow, buy it! Although I'd be skeptical that having any asset as >80% would really pencil out if objectively considering...

Maybe a risk tolerance thing for me??

After the stress testing it would all be over anyway

 

[street]

I'm curious as to whether you've considered any form of conservation trust in the situation you cited about possibly donating to the state? I'm trying to learn more about those myself & it may not come close to meeting your objective. I also don't know if it matters which state it is in &/or whether there are state specific programs for these cases...any insight appreciated

No, I haven't looked into any conservation trust or looked into how it can be done. I do know it can be done because another large chunk was given to state to manage from a guy that had no family with stipulations. My wish is to just pass it to my son. After that he knows what I would like done going forward so he or they can look into what it takes to give back to the public to enjoy but that might not get to that point.

The one huge benefit to operating a farm is the tax benefits. We did well when I owned an irrigated farm. With the Gov programs/benefits and tax deductions we did fine.

 

[KRABE]

On question of how much more...I would suggest "stress testing" to project the affect of various what-ifs. What if key people become disabled? What if interest rates .... weather events .... you name it goes wrong ... Will I be ok? Impact on rest of family (spouse, heirs, etc)? If it keeps penciling out that you'll have positive free cash flow, buy it! Although I'd be skeptical that having any asset as >80% would really pencil out if objectively considering...

Maybe a risk tolerance thing for me??

I understand the stress testing ..... but.. interest rate risk is not as big of a deal if rates are fixed for long term. Key personel issues are negated by being able to rent it to other farmers. Climate shift to a hotter climate would actually increase its profitability given its location in regards to access to irrigation and longer growing season being available. Biggest risk is deflation and people stop eating farmed commodities....

If it is leveraged properly the return meets most other forms of investment especially taking into account the tax benefits and using the tax savings to make or assist with the down payment to make it cash flow. So I struggle with not continuing to invest in it.

I never thought of excluding it from my asset list other than as an annuity because most of it should never be sold so thank you for that suggestion.

 

[luckydude]

I understand the stress testing ..... but.. interest rate risk is not as big of a deal if rates are fixed for long term. Key personel issues are negated by being able to rent it to other farmers. Climate shift to a hotter climate would actually increase its profitability given its location in regards to access to irrigation and longer growing season being available. Biggest risk is deflation and people stop eating farmed commodities....

If it is leveraged properly the return meets most other forms of investment especially taking into account the tax benefits and using the tax savings to make or assist with the down payment to make it cash flow. So I struggle with not continuing to invest in it.

I never thought of excluding it from my asset list other than as an annuity because most of it should never be sold so thank you for that suggestion.

IMO, 80% AA for farmland is too high unless you have a high NW with access to substantial liquidity elsewhere as backstop if something goes wrong.

If this is a leveraged buy, how sure are you that you can make the property cash flow positive? On the positive side, prime farmland is easy to rent out and expenses are fairly predictable. But is the rental income alone enough to offset mortgage payment for the farm + insurance + tax + other expenses? If there's a shortfall and you have to make up the difference by tapping liquidity from elsewhere, that would be red flag for me.

My farmland investment philosophy is that after the initial capital outlay for the purchase, each parcel needs to be self-supporting (i.e. income can offset expenses, taxes and whatnots) without requiring additional capital from elsewhere on my balance sheet. Otherwise, it just becomes a money pit.

 

[street]

Sure, I have a farm. It’s a long story.

We bought 157 acres in 2007. This is Eastern Oregon about an hour drive outside Boise. Irrigated ground with senior 1888 water rights. About 100 acres was crop land, the rest is bush along the river. The plan was to retire there after working in mega corp.

Retired and began house construction in 2017, finished in 2021- it was a long and involved process.

In 2018 bought the neighbors property , 90 acres with 60 irrigated.

So I’ve ended up with 250 acres with 160 irrigated. Very scenic and historic property. Not enough irrigated land to be deemed commercial in this part of the country, but not a hobby farm either. Crops are corn, wheat, pinto beans and alfalfa. I also run a small herd of 20 mother cows and sell the calves. Operations are on an asset lite basis - all the tractor work is contracted out, I take care of irrigation , spraying, management and drainage. Water is applied via siphon tubes from a cement ditch and then into the crop furrows. With an old 66 year old body this can be physically grueling and relentless task - 7 days a week during the water season which runs from May until September.

On a cash basis I break even most years, not including my time and major improvements which are depreciated assets. So many expenses when you first start out and every year a major project such as field leveling, irrigation pipe installation or stock corrals. The cows are probably the worst, hard to see how anyone can make any money ranching.

With the land, house , equipment and major improvements this farm is a $4MM investment. Land prices have went up considerably in the last five years or so. That results in a healthy balance sheet. It’s a non liquid investment and selling could take years. I wouldn’t recommend having a farm solely from a financial angle. The sunsets are great, the satisfaction of growing crops and feeding the planet is something I never experienced in a corporate job. Hopefully I can maintain a level of physical stamina to do the work for many more years, that will be the biggest challenge.

You made many great points. Most that make a living farming or ranching do it because the love of the work that is involved. They make a nice living doing what they like to take time away when they want to and be their own boss.

Ranchers here that most make a living raising cattle I think do well. When they sell 350 to 500 head of calves in the fall at 800 to 1400 dollars a calf, they can make a nice living. Even if half or three quarter of that calf crop is expense there is plenty left over to live a life they want to live. I know many and they aren't poor by any means.

The taxes deductions also play a huge part in that bottom line.

 

[freedomatlast]

We had a big house with a huge barn on a nice sized property adjacent to a 100 acre farm for awhile. I have a great deal of respect for farmers watching all the work that goes into farming and I certainly appreciate all that they do. What I never got used to, and subsequently moved from, was the almost constant smell from the hogs, chicken houses, fertilizers, etc. Made it tough to enjoy the outdoors many days of the year.

 

[Beachcomber]

My father grew up on a dairy farm and had a 300 acre farm in the corn belt. He was an entrepreneur and the last thing they sell is the farm.

I would love a small farm to grow my own crops and have something to do. Looking in NC mountains for something manageable. Wife may disagree as our main home is in Myrtle Beach SC, but we'll see.

 

[I am He]

DW and I own a ton. Right now, they make up around 55% of our NW.

We've been buying and selling and subdividing (for development) farmland/ranchland for 15 years. Great returns. We've also made $ from utility easements (water and power) and oil & gas exploration (small hit so far).

Recently we were approached by a wind farm company to put up wind turbines and electricity easement on a couple of farms. We bought these two properties for a couple of hundred thousands a long time ago. Company is proposing to pay us low six figures for an easement to run the transmission lines underground, plus USD $100k/year for 50 years (inflation adjusted) to have two wind turbines on the two properties. We'd still be able to continue to lease them out to farmers for rental income. We're still considering/negotiating but it's easy money and neighbors are all doing it.

I recall a podcast where they folks were in the biz of negotiating rights for things like that. As much as I'm a do it yourself guy, I'd probably want help on something that goes on for years.

 

[MrSmee]

I do. A farm that has been in the family for several generations. It is true that cash rent is not a great return but it is basically risk free. So it feels like a good backstop right now when I think we are looking at a big market decline. Put it another way, I can afford to take more risk in the market because I have the farm.

You can make a much better return if you crop share or farm it yourself. But then you have the risk.

 

[luckydude]

I recall a podcast where they folks were in the biz of negotiating rights for things like that. As much as I'm a do it yourself guy, I'd probably want help on something that goes on for years.

You're right about getting professional help. We've hired a specialist lawyer to help us with negotiations and reviewing contracts, and we're also working and sharing info with our neighbors. The lucrative terms are certainly very tempting, but we're still on the fence regarding tying up a couple of hundred acres with a couple of giant wind turbines overhead for 50 years.

 

[Markola]

In #76 above Is99 mentioned that the camp sits over some mines below it. That reminds me how complicated mineral rights can be, depending on the jurisdiction. I’ve heard about certain cases, like in West Virginia, IIRC, where ownership of different minerals is like a layer cake beneath the surface. If true, it makes me question whether a landowner in WV really owns much more than the topsoil layer and above, if someone or some company who owns coal, gold, shale or whatnot below it can extract it?

 

[Winemaker]

In #76 above Is99 mentioned that the camp sits over some mines below it. That reminds me how complicated mineral rights can be, depending on the jurisdiction. I’ve heard about certain cases, like in West Virginia, IIRC, where ownership of different minerals is like a layer cake beneath the surface. If true, it makes me question whether a landowner in WV really owns much more than the topsoil layer and above, if someone or some company who owns coal, gold, shale or whatnot below it can extract it?

The surface/mineral/gas/oil rights are pretty much determined by your deed, nation wide, not just WV, except for Hawaii. If you hold a deed in fee simple, you own the whole shebang. However, in states like PA and WV, Henry Clay Frick and company, went around buying coal rights from cash poor farmers back in the late 1800s/early 1900s. Over the past 10 years, due to the Marcellus Gas exploitation, property owners are finding out that gas/oil rights were not separated and they are still in control of the those assets. DW and I receive royalty checks, as well, as my neighbors, for our gas rights in our development.

However, water rights (riperian)are a different ball game. US property owners that own land that was originally claimed by the kingdoms of England/France have different water rights than property owners originally owned by Spain(first come; first served).

Airspace over one's property is something that is generally accepted despite you may not be able to seize/grasp that space. Multiple story buildings are always permitted, but zoning laws prevent one from putting up a high rise in a residential neighborhood. The FAA permits air traffic over US property without payment, but if an airport gets built next to you, you must/will be compensated for the use of your airspace for landings and takeoffs.

 

[Markola]

Excellent summary. Thank you and I’m glad you are being compensated for natural gas extraction. If the coal rights owner wanted to claim their coal, would the farmer above whose predecessors sold the mineral rights have any say about where the strip mine goes?