Wednesday, February 28, 2018

Question: How to find a farm to lease or buy

A farm is a red barn, right?  the new farm I purchased in 2017
There are lots of folks who want to farm, and the question comes up pretty frequently.  Here's how this one went: 

Hi there fellow farmers! I am a little new to the farm real estate scene. I am farming in my current location, but it's really not a viable area for it. After doing a lot of research, the areas that we are interested in DO have farms for sale, but the problem is either
A) They want to sell right away (therefore the possibility of using an FSA Loan, our only option, doesn't work for them)
B) There may be someone to work with us, but I have no idea how to find those people because I don't actually know anyone in the area.
It's pretty far away, so just dropping by to get to know people would be really hard but I might be able to make a weekend out of it.
So, dear fellow farmers, what would you do if you needed to move to a different area where you didn't know anyone?
Context: Northern California looking to move to Western Oregon, Western Washington, or possibly Denver-ish if their housing market crashes

I'll be looking for a new tenant for the farm pictured above this summer (current tenant moving to montana) so I asked what sort of farming that they wanted to do.  Answer?  

Hey that pretty much fits our timeline! We're currently raising Icelandic Sheep, Kunekune pigs, various rare breed chickens. We're small right now because we're restricted but we want to grow as fast as possible, but really want to be 100% grass fed. As long as you have grass we'll be happy.

Nothing that they described really sounded like profit to me, and unfortunately profit is how you pay the rent.  So I wrote back:  

3br houses rent in this area for $1500-1800/month. utilities are another $150. The 40 acres is in grass right now, produces 500 round bales a year @600lbs each (2-3 cuttings, weather depending). the bales cost me $13 each to produce, sell for $35, so the land nets about $11k/year, or roughly $275 profit per acre per year. so if you wanted a couple of acres you'd have to pay at least that per acre to make it worth my while.
I'm talking about this to you to give you an idea of what the math with be with any farmer landlord. your enterprise would need to produce $1600+150 = 1750 per month to cover the rent, and if you wanted 3 acres, add another (275 * 3 / 12 = ) $70 a month for $1820/month.
have you thought this through to the point where you have a plan to net (after taxes) $3k a month?

Think I was too rough on them?  


Bill Gauch said...

Rough? Maybe. Realistic? Definitely. That said, I am a firm believer in decoupling the housing costs from the farm costs. The prospect of a new farmer earning $275/acre/year (super cheap, BTW) to pay the landowner plus more for all expenses plus more to set aside for next year's expenses plus more to reinvest in land improvements and equipment is a daunting prospect. Dropping the $1500-1800 on top of that means they also have to earn a profit with no customers, no contacts, and no chance to build that before the start of the growing season. Ideally, they would have some off-farm income to pay the rent plus whatever they can scrape together to try to make their farm break-even.

With the designer shotgun method of farming that they seem to be taking currently, I assume they will make the rookie mistakes (probably buy 3 horses, 500 chickens, and 15 dairy cows in their first year) and realize they have no idea what they are doing. That said, if you really want to work with someone in a landlord-tenant farmer situation, you could potentially work with them to get them to produce for you. You have the existing customer base and the knowledge of a successful farmer and they have the ambition to farm. If you can get them producing eggs or meat birds, they can start thinking about the ideas of production, inputs, costs and returns and really get a rude awakening when they realize that it costs them WAY more in annual input costs to produce eggs than store prices.

Side note, with the massive increase in suburban backyard chicken raising going on, rare-breed chickens are poised to explode in demand (with potential for huge profits). 10 years ago, no one had backyard chickens. Now, I have to wait in line at the only feed store around for people to buy their chicken feed. Last time I went in, there were 4 people buying and one person holding up the line asking questions about what they needed to buy to raise chickens.

Rich said...

I rent land that has a house on it, but I'm only renting the farm part of the property, so I'm not sure why you would lump the house rent and utilities into the farmland rent discussion. Are you only going to rent the house to someone that is also going to rent the farm and do you also expect them to cover the rent based solely on their farm income?

I'm also not so sure I agree that the rent should be based on how much profit you are theoretically forfeiting by renting it to someone else instead of farming it yourself. How would a renter ever make any money if their rent payment was the same as their potential profit margin? If they were planning on also baling hay, they'd have to bale 500 bales of hay just to break even (if their cost of production was exactly the same).

On a side note, are you sure that it only costs you $13 to bale a bale of hay? Are you including your equipment costs, storage and handling losses, fertility, etc.? I've been trying to track the actual costs of the hay I bale and I usually come up with about $20-25 per 1200 lb. bale and I'm working with long-paid-off equipment, cheap land rent, and minimal inputs.

Nick Keenan said...

First rule of being a landlord is make sure the tenant can pay the rent. When you're a landlord your tenant's problems tend to become your problems, so don't invite problems upon yourself.

To the question of whether you were too rough, it may have been more diplomatic to say that you'd require documented ability to pay $XXX per month -- which either means an off-farm job, or a successful track record of raising, marketing, selling and delivering whatever it is they plan to raise.

A lot of people who've never done it think that working for yourself is like a job, you show up and do the work and get paid. It's not like that at all. You constantly have to concentrate not just on doing the job but also on making money at it.

The market for agricultural land is kind of baffling. I read Thomas Picketty's book, "Capital in the 21st Century," and he makes the claim that while for 99% of human history land was the greatest store of wealth, with the advent of factory farming land itself has become almost valueless. Farming on a commercial scale is now so capital-intensive that the value of the land is dwarfed by the cost of the equipment and the capital needed to farm it. This is not good news for people who just want to find a patch of dirt and scratch a living out of it.

As you've learned the way to succeed is to not try to compete on commodity crops. You've got to grow something where you can command a premium. That takes a level of business savvy that not everyone has.