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How Higher Land Values Affect Balance Sheets
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Higher land values, how do they affect the balance sheet? Higher values certainly add to an operation’s net worth, but it is the challenges they represent for business expansion and business transitions that truly need to be considered.


Source: GreenStone FCS Dollars and Sense Column in Michigan Farm News

How Higher Farm Land Values Affect Balance Sheets

When asked to write a column on how higher farmland values affect balance sheets, I thought that I was going to have the shortest essay ever, as higher farmland values make farm balance sheets look better. In reality, to assess the impact of higher farmland values you have to address the challenges higher land values present, and the answer can be different for each farm operation.

Land sales in Michigan’s traditional cash crop (corn/soybeans/wheat/sugar beets) areas have been very strong this year, with some sales reported as high as $6,000/acre, although the bulk of the sales still fall into a broad range from $3,500 to $5,500 an acre. So if you want to buy the 80 acres next door you are looking at an average investment of $360,000, if you’re fortunate enough to buy near the middle of the range noted above. This leads to the first challenge from higher land values, which is the large capital investment required to purchase land at the higher prices now present. There is no question that current interest rates are low and commodity prices are high, so it’s easy to be optimistic about the ability to generate a positive return on a land purchase, but do a couple of “stress tests” on the purchase before you sign your offer. How will the purchase look if interest/carrying costs increase and commodity prices decrease? Are there better uses for your capital than tying it up in a land purchase? A land purchase should be part of the farm’s overall business plan, not a spur of the moment decision fueled by one year of record profits.

Another challenge presented by higher land values is the impact on transition/estate planning. As land values increase the amount of capital required to buy out a partner, parent, or sibling also increases. It is critical to the long term success of your business that transition plans be reviewed periodically and amended as needed to meet the goal of continuing the business after the transition takes place. I have completed many appraisals for farm families that have struggled with a transition plan drawn up years before the event that leads to the transition, and the plan they had was inadequate as it had been untouched since the day it was signed. Farmland values have risen significantly over the last 25 years, and a transition or estate plan that was drafted when land was valued at $1,000/acre and corn prices were $2.00/bushel will be poorly suited to addressing the realities of today’s marketplace. Higher land values can have a huge impact on how to structure a business transition, especially in cases where there are family members that, while not part of the farm operation, still need to be treated equitably in the transition.

Higher land values, how do they affect the balance sheet? Higher values certainly add to an operation’s net worth, but it is the challenges they represent for business expansion and business transitions that truly need to be considered. And ultimately it is your response to the challenges that will determine the impact on your balance sheet.