Farm Horizons, April 2013

Land as an annuity

By Myron Oftedahl
Farm Business Management Instructor, South Central College

A couple of weeks ago, I heard Dr. David Kohl speak, and he made a comment about treating your land as an annuity. It got me to thinking. So, I am going to try to cover both groups of landowners in one article; the farmer owner and the landlord owner.

You, as an owner invested in the land expect some type of return. Often it is a control thing; I can’t lose it if I own it versus renting. So, what is a fair return? Most spreadsheets will use a return of 3 to 5 percent. So, if the land value is at $6,000, that would put your return at $180 to $300, plus insurance and real estate taxes. But, is there more than a monetary return? Should there be?

Let’s explore those non-monetary returns further. Are you, or is your renter maintaining or improving the soil sample values? Are you or your renter incorporating crop residues or manure to improve soil organic matter values and soil tilth? Are you or your renter maintaining or installing soil conservation measures? Are you or your renter maintaining or improving the drainage of the field?

I had a college soil professor write this on the board as a discussion topic one day. A productive soil is always fertile, but a fertile soil is not always productive. Think about it and the fields you farm. Can you pick out some areas that are fertile but not always productive?

Some other non-monetary returns are things such as plowing the snow in the winter, mowing the ditches, fixing the mailbox, plowing the garden, sharing yield information, giving you a ride, etc. These are examples of things that aren’t written into the rental contract, but add value to the rental amount. What would it cost you if you had to hire it done?

I started this article talking about treating the land as an annuity. I maintain that there are three types of annuities for landlords. The first is the savings approach. This is often between family members, where the owner is not expecting to maximize the return, but is more interested in seeing someone in the family farming the land.

The second is the money market manager, where the landlord expects a reasonable return on the investment and will often be in the 3-4 percent range. This group appreciates the extra little things that you, as a renter, do for them and they realize that you, as the renter, need a return on your investment, as well.

The last group are the ones who I will call the market chasers. These are the landlords who demand top dollar for their land, regardless of how you take care of it or the overall value of the land. The duty of the renter is to figure out a way to make a return.

You, as a farmer owner, need to consider which annuity you are going to use to manage the land you own. Do you put into it the minimum and hope for the best, do you do the little extras so that in a good year you can maximize the return. Or, do you push it as hard as you can, cutting corners if necessary, in order to show a minimal return? You need to make a choice as the owner. You may use all three approaches on different fields.

So, how do you treat your annuity? How do you treat your landlord’s annuity?

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