|Dear Michael: We have a rather farm operation with the numbers getting bigger and bigger every year. We recently had a land sale in the area where the land would have sold for five hundred dollars per acre ten years ago and it went for over two thousand dollars per acre.
It was just astounding to us, and a real eye-opener about our estate plan (or lack thereof) and how we are going to deal with these numbers for our daughter and son-in-law, who have devoted their life to the farm operation. There are four other children, but there's no way my child can afford to pay that much for this farmland to the other children.
How are we going to deal with this in our estate plan? Can we set it up so our farming child receives the land for much less than what it's worth? Can we gift it to them now to get the inflation out of our estate? What things should we be thinking of doing? –Land Boomed.
Dear Boomed: Land has 'boomed' and, yet, it probably hasn't seen the top end yet. When I was at the Big Iron Show in Fargo, I talked to a fellow from Iowa and I was kind of bragging about the increase in land values. He turned, looked me in the eye and said 'In Iowa, we pay four hundred dollars per acre rent, and when we buy corn ground, we pay between ten and twelve thousand dollars per acre for 280 bushel corn'.
'In this area, you've gotten your yields up to 100 plus bushels per acre, but the price of land is way less than one-third of what we pay for land. People in Iowa are talking about coming up here and buying three times as much land for the less price and the same yields, costs, etc. You think your land is overpriced??? Not from where we're standing down in Iowa. To us, it's still a bargain up here!'
Suddenly, I realized our overpriced land is not so overpriced when you do the math. Even if prices fell in half for a bushel of corn, wheat, etc. our land is still less expensive, in comparison to the rest of the country.
We're a little bit of a victim of being 'good producers'. As technology has changed, as yields have grown, and as demand stays high, it's being 'good producers' that's going to keep driving land higher and higher.
Today's farm business just isn't what it was in your grandfather's day any more. Heck, it's not even what it was just ten years ago.
The past decade has been like living through the industrial revolution in farming – much the same as the time period when we went from plows pulled by horse and mules to the first steam engines. Our progression in the past decade has been just as dramatic, and occurred quicker, than the past 'industrial revolution' referred to in history books.
Also, there are more and more farmers who understand every single part of their business – from crop forecasting, to futures, to machinery costs and returns, etc. – and they are really, really good at it. The knowledge growth in the past decade is just as astounding as the machinery innovations. We not only have multi-million dollar businesses on our hands, but we have CEO's and CFO's that would put many a 'big' business to shame for what they can accomplish with so few people.
The common lament I hear now is that farmers are handling so much more money but are showing less and less profit. I say this is untrue. I would rather take ten percent profit on a million dollars than a fifty percent profit on a hundred thousand dollars of gross income. Those are pretty close to real numbers of gross income for the decade, as well. The average farmer is working smarter, not harder and ending up with more 'net' income than ever before. It may not seem that way because the margins are much, much smaller.
One area I see farmers not keeping up with their business planning, however, is appropriate insurance.
Because of their increased value, many farmers recognize the fact they have to carry more insurance on their buildings, on their machinery, on their grain, etc. They also have to carry more liability insurance, as well. Why? Because they are worth more if they are sued.
I'm always amazed that farmers will carry one million, two million or more liability insurance because they know they are worth more than that if they are sued. However, they won't insure themselves for this same amount in life insurance, even though the chances of getting sued (2%) are less than dying (100 percent).
They'll insure machinery, buildings, crops, etc. for millions of dollars and spend tens of thousands in premiums for coverage without batting an eye, yet scream if they have to pay more than a thousand dollars on life insurance or nursing home insurance. Most farmers walk into my office with between one hundred and two hundred and fifty thousand dollars on themselves (other than what the bank required on their loans) and tell me they are sufficiently insured. Typically, one of their tractors is insured for more than they are!
If you have a farming child, and want them to take over someday, you better get some perspective on what's really going to keep your farm going in the future. It's going to be a lot of money and you need to decide what's the most economical way to provide for this eventuality.
We'll talk more next issue about straight-up options, what the costs will be, and what will work best in your farm operation.