Saturday, November 10, 2018

Land Buyer's Logic

November 1996

Farm magazines can always count on the subject of buying land for several pages of print every year. This eternal agricultural question reminds me of the old joke about economics tests in college. Professors can use the same exam every year - they just change the answers.

To help readers decide whether to buy or not, most advice articles include rigorous mathematics and sobering statistics. I personally pore over these examples and then ignore them to make what seem to be exceptionally irrational decisions. Am I simply foolish (very possible) or are there other ways of analyzing this decision? In consideration, I would offer some usually ignored, but significant reasons in support of our desire to own the land we farm.

The Critical Ingredient: Of all the requirements needed to farm, nothing is more crucial than land. Moreover, nothing is more difficult to get and maintain control of. Machinery, labor, crop inputs - even money - are readily available from multiple sources at any time and location. Price is a major consideration, but not supply. Land, however, is both strongly held and thinly traded, especially rental land. The timing and location of land opportunities are seldom coordinated with your personal farm plans. This obstacle has impeded more farm careers than any other. To put it plainly, sometimes you buy land “against the numbers”, just so you can farm.

The Phantom Average: Unless the figures in the buying example are specific for one actual case, averages of some sort are substituted. As more and more averages are added, the usefulness of the analysis is diluted until, like the legendary American Family with 1.7 Children, it no longer represents reality. In reading the columns, I tend to note those figures that disagree with mine (yields are too low, seed cost too high, etc.), and then view the resulting totals as irrelevant to me. In addition, the number of hidden assumptions is very large. For instance, I have no knowledge of anyone actually confronted with a rent-or-buy decision. The assumption that land is always available to rent, or that a piece of desirable ground will be available to buy when you are good and ready is highly unlikely. The idea that land stays rented (or under the same terms) as long as land stays owned is questionable. Actual statistics for my area indicate an average tenure of about 12 years.

A corollary to this principle is the Precept of Compounded Probabilities. A one year cash flow statement strains my prognostication powers to the limits. A twenty-year projection is a shot in the dark by about year 3. Piling assumptions on probabilities yields at best, hand-grenade accuracy. History often provides a better perspective, and history does not show farm ownership in a bad light.

The Law of Highest and Best Use: The underlying motivation for many economic analyses is that I want to maximize my return, or generate more wealth, measured as MONEY. However, comparing a land purchase with high-yield corporate bonds doesn't mean much if I don't want to own bonds. If I choose to invest in land, perhaps it's because I know something about and like land, (plus it gives me some way to make a living), while I have much to learn about annuities or bonds. Maximizing satisfaction or happiness may lie in a slightly different direction than maximum dollars, and perhaps should be given at least equal weight. It is just as foolish to ignore your personal preferences when making investment decisions, as it is to slavishly follow your heart.

The Principle of Enforced Savings: Few things are more difficult for the self-employed than regular saving. The logic that the land payment that I would not be making if I did not buy ground would flow to some form of savings is doubtful at best - at least the full amount. I am old enough now to realize that it would largely sift through the economic cracks, leaving me wondering where it went. The land payment, however, gets bugeted, worried over, and somehow paid. Indeed, the bank has personnel specifically tasked to remind and urge me to make this payment. They will even call (repeatedly) and drive out to my farm (how thoughtful!) to see that the check gets written. Moreover, an increasing part of that check is written to “us”, in the form of equity, and now, after several years, a small light is glowing faintly at the end of a 20-year tunnel. For those like me, this Discipline of the Uniform Commercial Code, and simple honor, holds us to the fire better than our best intentions. While it may not be the absolutely most efficient method of accumulating wealth, it works modestly well for a semi-profligate such as myself.

The Problem with Predictions: Predicting land prices is not easy. There are currently several national advisers desperately looking for a price collapse they called to occur in the early 1990s. Look in the old copies of farm magazines under your couch at what the self-appointed doomsayers were predicting then. In my opinion, land should be viewed as a 100 year investment, as a minimum. Given that perspective, the long term investment is not too sensitive to when you buy, but if you buy. This is no different than any other sound investment, such as stocks. Expecting to pick the highs and lows of the land market will yield the same results as a similar grain marketing plan for most of us. Over the long haul, it really won’t matter. Perhaps my great-great-great-grandfather paid a ridiculous price for our home farm. Who cares? All I know is that his efforts gave me a chance to farm, and I honor his memory for it.

The Bias Problem: Much has been said about the single-minded focus of farmers for land. Interestingly enough, we are not the only profession with such prejudices. I have noticed accountants and financial advisors, for instance, tend to favor money, especially cash or easily convertible assets. The reason is analogous - they “farm” these assets like we do land. If you make your living by moving others’ money from one form to another, seeing it tied up for centuries in land, which ends their involvement (and commissions) is not attractive.

The Rule of Price: When is the price of land too high? Simple. When you want it and can't pay for it. Any price below this is OK, in my book. It has nothing to do with the price of corn or T-bills or inflation. The words “high” and “low” are subjective measurements, with personal meaning only. They measure the things you hold dear or meaningful, and have nothing to do with national averages or rates of return. A story was told by a farm business analyst of an 80+ year-old farmer paying a seemingly exorbitant price for a field. When asked, the old gentleman explained that it was the first farm he ever worked as a young man, and he had always promised himself that he would own it someday, somehow. The speaker's point was how irrational some are when it comes to land, but I think many of us can find more logic in the fulfillment of a half-century-old dream than the single-minded accumulation of cash. Whether we want to admit it or not, there is a Pearl of Great Price in all our lives. What a pity if it is only money.

The Cashflow Criteria Subaxiom: Land should always cash-flow. What this means is not universally agreed upon, but you won't be taken seriously if you don't use this phrase several times during any discussion of land. It is important to remember, however, that land prices only have to drop to the cash-flow point of the economically strongest farmer, not the average farmer (or farther below, me). Further, it seems always the case that these economically sound farmers are interested in the same piece of dirt you are. The result is that land prices seldom seem reasonable to a majority of farmers. Once land is paid for, however, the price of land doesn’t mean much, because farmers usually don’t intend to sell it.

The Pursuit of Freedom: You choose "rent" in the rent/buy decision. Now you want to try no-till (or tofu beans, or post-emergence chemicals). But what will the landlord think of you, even if he/she agrees? Perhaps you better play it safe and do it The Way We've Always Done It. What will happen to the innovators who need perhaps 10-15 years of mixed results to hone the farming solutions for the future? We need the freedom of some ground where we can exercise our own ideas, or at the least relax a little when we farm it. What number can you put in the analysis for the privilege to farm without having a cranky ex-farmer second-guess your efforts or pressure your decision-making? Or more difficult, what is it worth not having to worry about your widowed landlady making ends meet because you picked the wrong herbicide? I personally consider the rights of a landlord to choose the farmer to be the single biggest asset included in the land purchase. As talk of sky-high cash rents, privilege rents, and 60/40 shares becomes fact, this right, acquired only with ownership, adds even more value to a land purchase.

Widened Horizons: Farmers who buy farmland get other things hidden in the deal that they don't expect, such as (a) a new appreciation for land assessment methods, (b) a eye-opening lesson how much bins, sheds, and tile cost in comparison to the return, and (c) a strange sense of isolation when distributing blame. This in turn, frequently makes him a better tenant, and more likely to think before (a) voting for a new school swimming pool, (b) whining about how bad the old barn is, and why we need a grain leg, or (c) blaming the landlord (he won't let me use enough fertilizer) for disappointing performances. At the least, it may help the farmer appreciate the point of view of his landlords.

The Cure for Myopia: Next to marriage, a mortgage is the longest obligation many of us will ever incur. Given the current marriage statistics, it may be number one. In order for a farmer, or it is to be hoped, a farm family, to decide to buy land, they must first reach an assessment of what they can do in the future. This act of evaluation can force them out of a ME- NOW world, into an US-THEN world sometime in the future. They make a commitment and publicly declare it, enacting traditional ideas of honor and faithfulness. This process is one of the most necessary activities of a meaningful existence. It sets a definite goal in the future and provides a way to measure the progress. Buying land is a statement about your belief in yourself and your basic optimism about our industry. It does not say that conditions will always be easy, but that you believe you can find a way to succeed. The most surprising part is that this attitude can buoy the spirits of those around you. Many successful landowners were encouraged to action by the example of one of their friends - i.e., “Crimony! If John Phipps can do it, I certainly can.”

The American Tradition: As best I can discover, early American settlers did not leave the serfdom of Europe to come and be tenants here. Neither was the Homestead Act devised to enable farmers to rent more ground. An abiding principle in the development of US agriculture has been farmer- ownership, so it is hardly surprising that many of us feel an almost inborn compulsion to own ground. Maybe there is a “farmer gene”. This desire is at least as reasonable as other drives, such as the desire to explore, or the desire to build. It is an expression of the spirit of our nation and defies quantification. We may yet exchange this heritage for salaries and full health care benefits, rushing eagerly into economic serfdom to a landed gentry, but it will be at the cost of a key element of the American character.

The Last Refuge of the Mildly Competent: I am not a great farmer. In our business, this is not a secret that can be long hidden. For me to expect to be selected to rent ground over the jaw-droppingly accomplished and driven competition I face is specious logic. I mean, I don't even have an entire- shop-in-a-truck or a fax in my combine and (this is difficult to admit in public) I DON'T USE OPTIONS! I suspect there may be one or two other farmers out there that are not in the SUPER 100 MOST EXCELLENT MANAGED FARMS IN THE KNOWN UNIVERSE. Sooner or later it dawns on you that the only person likely to rent ground to you is you.

The point of all these arguments is not that economic analysis is of little use. I read and use many of the ideas of ag economists and financial advisers to aid decisions to buy or not buy land, as well as reams of paper and hours of computer time. But non-numerical reasons cannot be dismissed as trivial and, knowingly or not, advisers flavor their analyses with their own personal spin. Our lives cannot be totally reduced to financial terms. What the numbers can do is provide a path for us to follow once we have identified what our goal is - and the goal IS NOT the accumulation of money. The goal is the accumulation of happiness. 

Furthermore, the obvious risk of buying land may mean more anxiety than you want. This too, is a valid recognition of what is important in your life. What is seldom mentioned in the arguments over buying or not, is that most people are successful at it. Payments get made, mortgages get lifted, difficult times are endured. For example, the default rate for commercial farm mortgages at the height of the farm “crisis” (1987) was about 7%, or as I like to describe it, a success rate of 93%.

In the end, buying land was best described to me by my father, who summed it up as “biting off more than you can chew, and then chewing it”.