The Big Picture by J.T. Korkow: How much is too much? | TSLN.com

The Big Picture by J.T. Korkow: How much is too much?

JT Korkow
The Big Picture

I think one of the most common stories I've heard when it comes to ag land being sold is the regret from a neighbor that he did not seize the opportunity to purchase the property next door when it came up for sale. The justification was that it was way too high priced and you can't make it pencil! Although that statement will justify a pass on most any investment, land nearly always seems to sell for more than it can produce. My favorite story I would tell whenever this subject comes up, was told to me by an old family friend, Joe Smith, when I was in my early 20s. It had left a big impression on me at the time and I never forgot it because of its continued significance.

In the '80s, after enjoying our Thanksgiving dinner, we were talking about the status of land prices and commodity prices when Joe said that he couldn't believe farming had become so futile. He said "in 1952, I found a quarter section of land with a house, barn, and chicken house on it for sale for $50 an acre. I had $500 to pay a down payment and borrowed the rest from the Carthage bank. Mae and I moved into the house and made a home out of it. I got a used tractor, plow, and drill, and planted 50 acres of durum wheat that first year. When I harvested it, it made a little over 30 bushels to the acre, and I sold it for $5 a bushel and paid the entire loan off at the bank the first year."

Now that is the one and only time I have ever heard of someone purchasing farm ground, with a home and improvements, and paying it off the first year with what it produced. It's no wonder the old timers would look at us young fellers like we were a bunch of insolents when we complained we couldn't make a living at farming. I think we all agree you can't make it work that way today, unless you bought in the Baaken at the right time in the recent years. Obviously, timing and location is everything when investing in real estate, but in general, land is a hard asset that will hold and appreciate in value in the long term. As the saying goes, "they ain't making any more of it!"

In our listing and selling real estate, we try to stay informed on what the market is doing in our area. Because the area we market in consists of primarily cow and hay operations generally sold as complete working units, we began to tie the value of these ranches to a cost per animal unit based on its true carrying capacity as a quick way to determine base value, then make adjustments due to seller's timing, improvements, access, and leased verses deeded land. Only three years ago we were selling ranches ranging from $6250 to $9250 per animal unit. Again, the $6250 ranch had more lease land than deeded, and lacked in improvements and repair, whereas, the higher value sale had excellent improvements and was in good repair. The lower priced ranch sold within three months of listing, as the seller requested, and the higher priced sale took a little over a year to sell. Both ranches were in the same county. Note that calves were selling at that time around $750/head.

Now, fast forward to current day, and we are seeing fewer ranches on the market, and the recent sales reported are from $10,000 – $12,000 per animal unit! And the calves sold this fall ranged from $1,500 to $1,800 per head! It is definitely a seller's market for both commodities and the relationship between the two is significant to note.

As we begin to see more heifers retained and bred this past summer now hit the markets, the demand for grass and ranchland is nearly in a state of frenzy. Ranch land we had on the market for the past four years and deemed to be "way to high" by the neighbors, ended up being sold for more than the asking price this fall, due to sudden influx of interest. And yes, the neighbor finally pulled the trigger. We are constantly getting calls for grass to lease or buy, and bystanders are trying to get into the game.

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But talk about making a lender squirm. They must be having some long discussions in the boardroom trying to decide just how far to go with this market environment. There are some that think we may be getting set up for the '80s all over again. I had one of the locals tell me this past week that his lender is valuing his young, bred cows at $800 per head for lending purposes. Furthermore, I heard the banks are charging in excess of 6 percent on their loaned money! Now that's another subject for another day, but it does make one question just how much the bank is at risk that they feel they need to charge that much interest when they are paying their depositors less than 1 percent. Obviously, if you were looking to your banker for some advice, (which they are not supposed to give, by the way) you would probably see their face turn pale and their gums turning blue. Bankers are trained pessimists, and rightfully so, as they have been beaten down by the feds so much, they are scared stiff if they sense there is any downside risk in any business sector market. And based on historical market cycles of supply and demand, there appears there may be more downside than there is upside potential coming in this cow deal. My sources say we may have a couple more years of enjoying this high market, but political, financial, and urban economics will play a hand along with our weather and feed supply.

So how much is too much? That is something we all have to determine individually, but ultimately it is how much can you afford? The best advice I can give, and as one of my friends would say, "you get it as cheap as I did," is to move forward with caution with plans of expansion. Let's make sure we recognize where we are at currently, and that is that the surf is up, and we are riding the big wave, that we are aware where the wave is heading, to stay alert and get off before we crash onto the rocks. In other words, keep your eye on the big picture!

Ecclesiastes 2:18-21 I hated all things I toiled for under the sun, because I must leave them to the one who comes after me. And who knows whether he will be a wise man or a fool? Yet he will have control over all the work into which I have poured my effort and skill under the sun. This too is meaningless. So my heart began to despair over all my toilsome labor under the sun. For a man may do his work with wisdom, knowledge, and skill, and then he must leave all he owns to someone who has not worked for it. This too is meaningless and a great misfortune.