Dear Michael: We have an interesting situation in our family. Our youngest son, who has been farming with us, wants to take over the family farm. He is doing quite well and already has a balance sheet of close to a million dollars with new machinery and some land he purchased. The problem is in our particular area, there is oil (although we don't have any) and many speculators and larger farmers are moving in and driving up the cost of land. We have two other children who do not farm. I don't know what we are going to do to help our youngest son buy out the non-farming children or what is fair? Is it the price of the land as it's going today – or is it what the land will produce from a farming standpoint? How do we know if it's still going to be this value in the future? We are lost. Help! – Lost In Oil Country
Dear Lost In Oil Country: Ten years ago, North Dakota was the second least populated state, we had one of the lowest per capita incomes, but the cost of living was also one of the lowest.
Guess what happens when you take a state of six hundred thousand people and throw billions of dollars into the economy? Cost of living goes up – costs of housing goes up – and the costs of land go up – especially in a vibrant farm economy.
The problem is this: This situation is not going to change soon. The oil economy is set up in such a manner they are only now taking less than 1/10 of one percent of the recoverable oil in North Dakota because, quite frankly, this is what keeps the price of oil up high enough to make this profitable. Why glut the market and drive down your long-term profit margins? You notice Big Oil has been noticeably absent on the Trans-Canada Pipeline debate – and the reason is it would drive prices down.
Farming is also at an all-time high due to several factors. China and India have improved the standard of living in their respective countries two-fold over the past ten years. In other words, the average worker is now earning – and eating better – at twice the rate of ten years ago. When you take the combined population of these two countries, you get a lot of mouths to feed.
Ranching looks good because of two reasons – one, the aforementioned population boom – and the second was the drought across the country driving cattle numbers down in the nation to 1950 total cattle numbers. It's going to take a long recovery time to get cattle numbers up to where these herd numbers come back to 2001-2002 numbers.
With all of these factors coming together, it's quite possible we are in for a long-term – perhaps twenty-five to thirty year stretch – of comfortable growth in our state. If you are worried your son won't be able to make a purchase of the property today, imagine if the growth rate continues at a meager five to ten percent (compared to twenty-one percent the last few years).
On the other hand, it appears your son is doing a great job of acquiring his own net worth. Looking back at my generation when I was growing up, what twenty-eight year old kid had a net worth of a million dollars? In fact, ten years ago, what twenty-eight year old kid had a net worth of ten million dollars? In essence, he already is enjoying the economic growth of what's happening and if you continue to help him, it's conceivable he can walk away at the age of forty with two or three million dollars! I hate to tell you, but not many people in the U.S. – except for the 'Ubra-wealthy' can do this.
Your son has two options. Up to this point in time, he's likely been acquiring his own farm assets because you weren't ready to sell him any of your land. He's obviously done well considering his balance sheet.
He can start purchasing your assets today to lessen the impact in the future.
The problem with this is your land is your Social Security fund – and the way Social Security is going this might be your ONLY social security – it's tough to figure out how much to sell to him each year and not run out before you die.
His other option is to put aside enough of his earnings today to purchase out his siblings in the future.
The obvious problem here is how much to put away and what amount will be enough? The backside of this is if he doesn't put enough funds away, and interest rates return to the normal five to ten percent range, he may be putting more into bank interest someday then what the place is worth.
I'm telling all of my clients today to plan their farm operation for values going up – not down – and how they can leverage the dollars today to provide for the inevitable future. If I can put twelve thousand dollars aside today and guarantee I'll have a million dollars of tax-free money in the future to pay my siblings, that seems to make a lot more sense than guessing at what the future may or may not hold.
Many clients balk at this thought thinking manna from heaven is going to drop someday and prices are going to drop on land values while revenues from farm income stay the same or drop marginally. Guess what? Plain old economics will tell you that's never happened before and it's not going to happen now – so if you don't plan for the inevitable today, you're planning on failing in the future. Leverage your funds today to provide for the future.