Is farming profitable?

[collegeinvestor]

I was wondering if anyone on here owns farms as investments as opposed to stocks and bonds. I always wondered if commodity-like businesses such as farming do well. Thanks a lot for the help.

[NormR]

I was wondering if anyone on here owns farms as investments as opposed to stocks and bonds. I always wondered if commodity-like businesses such as farming do well. Thanks a lot for the help.

 

It is on facebook.  ;)  (Sorry, couldn't resist)

[woodstove]

Yes, farming can be profitable as an investment. You have to be careful in deciding what you want from it however. Farming and rural life is enjoyable in itself, desirable for raising kids, etc - but most farmers have to have other sources of income, ie job of some sort.  If you're planning to relocate your family to the country, by all means do so, but don't think of the farm itself as an investment, rather a framework for your lifestyle.

 

As a straight investment...

 

- Best to buy when interest rates are high, because land prices are low then. Eg 10 pct interest available on 5-year GICs means farmland cap rates will be 8 pct, say. Gives you a nice appreciation in land price when rates return to normal. Not cash in pocket, because it's so long term you'll never sell, but you'll feel better. I've owned 17 years, and it took 14 years to get purchase price back in cash flow, but land is nominally worth 4x what was paid for it.

 

- Register your farm operation for GST, before you buy the land. You get the purchase tax rebated later. Consult your lawyer and/or accountant at purchase time to be sure you get this right.

 

- Cropland is simplest. No fencing, no early morning calls about livestock straying.

 

- Rent your land to someone who knows how to farm. Don't second guess decisions. In particular, organic is a nice thing, but probably not profitable if you value your time. "Investment farm" does not equal "hobby farm."

 

- Fair rent is about 25 pct of gross value of the crop. I rent for 10 bu/acre soybeans market value, paid in cash after harvest.  Does not mean the renter has always to grow beans - that would be poor land management.  He farms plenty of other land and might grow beans on that. Having a 10 bu/acre rent on land that is capable of growing 40 bu/acre, means we don't have to renegotiate cash rent. Both he and I can plan long term.

 

- Rent to someone you can trust. So you don't end up with a tire dump, other rubbish, strange crops, etc. Too-high rent usually goes with something unsustainable.

 

- Income taxes are very simple. 4-page schedule for farming income, of which only a few lines are used. Won't need an accountant.

 

Finally, back to the psychic benefit aspect...

 

- Most farmland has some back area, because swampy or not easily accessible. About 6 pct in my case. That is great if you enjoy tree planting, other outdoorsy activities. It doesn't have to be all investment, but I've found it helpful to separate the two land usage ideas.

[twacowfca]

Yes, farming can be profitable as an investment. You have to be careful in deciding what you want from it however. Farming and rural life is enjoyable in itself, desirable for raising kids, etc - but most farmers have to have other sources of income, ie job of some sort.  If you're planning to relocate your family to the country, by all means do so, but don't think of the farm itself as an investment, rather a framework for your lifestyle.

 

As a straight investment...

 

- Best to buy when interest rates are high, because land prices are low then. Eg 10 pct interest available on 5-year GICs means farmland cap rates will be 8 pct, say. Gives you a nice appreciation in land price when rates return to normal. Not cash in pocket, because it's so long term you'll never sell, but you'll feel better. I've owned 17 years, and it took 14 years to get purchase price back in cash flow, but land is nominally worth 4x what was paid for it.

 

- Register your farm operation for GST, before you buy the land. You get the purchase tax rebated later. Consult your lawyer and/or accountant at purchase time to be sure you get this right.

 

- Cropland is simplest. No fencing, no early morning calls about livestock straying.

 

- Rent your land to someone who knows how to farm. Don't second guess decisions. In particular, organic is a nice thing, but probably not profitable if you value your time. "Investment farm" does not equal "hobby farm."

 

- Fair rent is about 25 pct of gross value of the crop. I rent for 10 bu/acre soybeans market value, paid in cash after harvest.  Does not mean the renter has always to grow beans - that would be poor land management.  He farms plenty of other land and might grow beans on that. Having a 10 bu/acre rent on land that is capable of growing 40 bu/acre, means we don't have to renegotiate cash rent. Both he and I can plan long term.

 

- Rent to someone you can trust. So you don't end up with a tire dump, other rubbish, strange crops, etc. Too-high rent usually goes with something unsustainable.

 

- Income taxes are very simple. 4-page schedule for farming income, of which only a few lines are used. Won't need an accountant.

 

Finally, back to the psychic benefit aspect...

 

- Most farmland has some back area, because swampy or not easily accessible. About 6 pct in my case. That is great if you enjoy tree planting, other outdoorsy activities. It doesn't have to be all investment, but I've found it helpful to separate the two land usage ideas.

 

 

Excellent summary!  :)

[tyska]

- but most farmers have to have other sources of income, ie job of some sort. 

 

 

  http://farm.ewg.org/sites/farmbill2007/

 

Not completely relevant but an informative web site, just applies to the U.S. though, would be interesting if one was available for Canada but you know how our government likes releasing information.  ;) I used it once when a farm paper ran an article about an ag economics professor from the U.S.. He was giving talks in Canada about how to manage cash flows and using debt for expansion, talked about how effective it was in his farming operation. Turns out the various operations he was associated with had received millions in direct subsidies in the last few years, I guess economics is all relative.

 

Would be interesting to see where it would all level out without all the subsidies, but probably not in my lifetime. It seems the more they try to save things the more they destroy them.

 

Dan

 

Dan

[woodstove]

Subsidies, or more generally tax policies, certainly do distort choices in farming, just as they do in other industries. Driving thru St Joseph County in SW Michigan, one is struck by the unusual number of irrigation systems installed, and also by the number of small industrial plants in rural areas - compared say to Chatham-Kent in Ontario, which has roughly comparable climate, but has more greenhouse operations and, most recently, a huge crop of windmills planted.

 

Farm economics are not something I've studied, but just browsing around, perhaps the following website will have some useful info:

http://www.ridgetownc.uoguelph.ca/research/research_reports_topic.cfm?ref=ECONOMIC_IMPACT

One particular report, for instance, presently #16 in that list, Agricultural Economic Impact and Development Study for Chatham-Kent, has more detail than I can deal with. Report #11 on the structure of Canadian farm incomes might be closer to the question of off-farm jobs; I've not pursued that lead.

 

There are going to be major changes in farming due to energy costs. Corn cribs and drying on-the-cob have been replaced by shelled corn harvesting and storage bin drying using natural gas.  If natgas pricing goes up, someday the economics will reverse and harvesting may go back to on-the-cob, wind/air drying, etc. There will be opportunities for those who make the new (old) grain handling machinery.

 

The role of an investor in farming, aside from just buying land as an asset and letting a skilled operator apply his expertise to the tasks, would seem to me to be to adjust to the opportunities as the economic, subsidy and other currents shift. It it not that dissimilar to any other focus of investing. There will always be subsidies, ie currents, within the investment ocean. Some will bring schools of fish nearby.

[collegeinvestor]

Do you know people that own the land and farm it themselves? I am guessing that has a bigger accounting profit but maybe not economic profit. If you got your cash back in 14 years you have a cash yield of 7% which is pretty good? I am really interested in farming eventually. I just want to save enough cash where I won't have to worry about making the payments. I want it to be more of a laid back atmosphere. Thanks for the help. Its not all about the money, either. It would just be really cool to own a farm eventually and not lose all my money.

[collegeinvestor]

Im currently still a sophomore in college here in the USA.

[nodnub]

Its not all about the money, either.

I agree

 

It would just be really cool to own a farm eventually and not lose all my money.

Did you ever hear the one about the farmer that won the lottery? They asked him if he had any plans for spending the $10million prize. He answered "No, not really, I guess I'll just keep farming until it's all gone."

 

[tyska]

I farm in northern Saskatchewan so any examples I have would be useless to you. You have to realize that your question is also like asking is investing in stocks profitable, it is for some it isn't for others. All I now is that on average, outside of the supply managed sectors you aren't going to make 7% cash yield on your capital investment by farming here. If you happen to be near a city you may be okay on land appreciation.

Was reading somewhere not that long ago that ranching land in the U.S. about 15 years ago used to be priced strictly on the production capacity of the land. Now it is priced more for it's recreation value, sort of like lake property.

 

Good luck and hope you are able to fulfill your dreams.

[woodstove]

About 7 pct cash yield, that was mostly the result of luck, buying at a time when 8 pct cash yield looked not as good as 10 pct GICs. And partly being willing to tolerate uncertainty - our offer was put in for the residual land after a couple of 50-acre lots were mapped out to be severed, and was subject to the seller being able to obtain permission of govt for the severances - so took about 6 months to resolve. And we were willing to take the residual land without a survey - on a so-many acres "more or less" basis.  It turned out to be 7 pct more, ie another lucky circumstance. Yield nowadays would be only 2 pct, ie land prices are unreasonably high considering productive capacity. That will change someday.

 

If you want to get an idea of prices, drive around, see which real estate agents are listing farmland on signs at interesting-looking places, and chat with them. Their business is built around chattiness, and it is not a burden for them to talk to potential future buyers.

 

I recommend debt-free purchase to the extent possible. Debt is a real killer. If GICs are 10 pct, mortgages are going to be much higher than that.

 

Friends in mid-20s recently bought in the country, just 1 acre, and decrepit house - which they have/are fixing up.  They have regular jobs for income, youth, energy, and stable marriage - all, if not essential, certainly very helpful. Raising garlic, a few chickens, etc. They will do fine. My wife's parents moved to country from big city a couple generations ago, similar circumstances, and had a great life - but had regular jobs, raised small herd of beef cattle. All the benefits of country life. I remember the mortgage-burning ceremony when they finally paid it off. My own experience with farming is limited - we farm-sat once for three weeks, and I encountered the wonders of what can go wrong with electric fencing - the fencer broke, a weed-chopper type which means it has enough current to cut down weeds as they grow to touch the wire, and by the time I got the parts, the weeds had grown enough to ground out the fencer. So I ended up scything the weeds on a perimeter of a very large pasture. A quick way to make sure the weeds have been scythed enough is to touch the fence to see if current is flowing thru.

 

I just strongly recommend a source of income. The lottery might work if you can organize that. Value investing might be easier though. And your best asset is yourself - youth, brains, capacity for hard work, positive outlook.

 

Rural life is great. Another way to get a feel for it is to go to some of the country markets or the fall fairs, the little ones, and get in conversation with people. If you mention your goals to others, sooner or later you meet someone who will have some information that will help you.

[oec2000]

Woodstove,

 

Given your knowledge and experience in farming, would be curious to get your thoughts on Sprott Resource's (SCP-T) investment in One Earth Farms.

 

http://www.sprottresource.com/one_earth_farms.html

 

Their strategy is to lease farmland from the First Nations with the goal of creating the largest and most efficient farming operation in Canada. Sounds good on paper but isn't farming just a low return commodity business at the end of the day? SCP may just be trying to time the market cyle or perhaps they really believe in the long term secular story.

 

Thanks,

oec

[bookie71]

Years ago, in another life, I did a lot of farming and cattle clients.  the rule of thumb was tey would farm until the money ran out.  By then the city (Phoenix and Tucson) had gotten close enough that they could borrow enough to farm for a few more years.

That aside the only ones who consistently made money were the citrus growers and one rose farmer.

I'm not sure how it is now but that was back in the early 60's.

[woodstove]

Hi oec,

 

My "experience" is only 1 pct of what a person who actually farms would have. I'm only a landowner who rents to a farmer, and have some relatives who are farmers who sometimes explain stuff to me, and sometimes go to fairs and open houses - but that is NOT experience! You perhaps should ask tyska who is actually farming in the prairies.

 

That said, I would not personally invest in that Sprott thingie. Not enough margin in farming to pay a slice to a middleman. And the terms of an agreement can change - remember income trusts?  Remember 20 pct taxes on land purchasers by foreigners? Remember nafta and changes to supply management? Lots of changes come along over time, that can be used as excuses by insider control folks to "explain" poor outcomes for outside passive minority investors.

 

Finally, the Sprott thingie seems a bit insulting to me. A friend (now retired) was responsible for the farming operation on a nearby reserve. He is Indian. What is that idea implicit in the Sprott fund that Indians cannot run professional farming operations? Ticks me off.

 

A friend in a nearby township, who's in a position to know, said that the largest landowner in their township is now some Toronto law firm. There is a lot of money going towards land purchases. Prices are ridiculous. Probably on the "they're not making any more" theme. But suckers are born every minute, so there are always lots to be sold to.

 

Your mileage may vary. But that's my cynic's view.