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Buying or Leasing: How to Make the Right Decision on Farmland

March 17, 2016
Contact: Shelly Mayer

Buying or Leasing: How to Make the Right Decision on Farmland
Dr. Bruce Jones says there isn't necessarily a right decision on whether to buy or lease farmland when it becomes available as long as you have the right information to make a good decision. A professor of Agricultural Economics at the University of Wisconsin-Madison College of Agricultural and Life Sciences, Jones discussed the topic during the Professional Dairy Producers of Wisconsin (PDPW) annual meeting in Madison.
“Having the acreage for forages and nutrient management is a challenge facing many farmers,” Dr. Jones explained. “When the opportunity arises to gain access to more acres, the decision to buy, lease or sell is crucial to farm sustainability.”
While adding farmland acreage can boost the profits of farm businesses, it can also jeopardize the financial stability of an operation if you're not financially prepared to acquire it. Dr. Jones says farm owners must consider several key factors when contemplating farmland purchases.

“Can the farm's cash flow make the monthly payments? What is the land worth? And can this purchase yield a return on investment? These are all questions you need to ask yourself before pulling the trigger,” Jones said. “In some cases, you may find that it makes more sense financially to just lease the property.”

If buying is a feasible option, Jones says it's likely going to be a good investment in the long run. USDA statistics show that the value of U.S farmland has increased by an average of 6% annually since 1950; with that trend being even higher since 2000.

Finally, Dr. Jones encouraged PDPW members to ask themselves whether buying farmland is more about profitability or financial feasibility in their particular situation.
“Depending on your age, it's a good idea to plan ahead and determine if the deal make sense to eventually sell farmland in order to fund your retirement,” he points out. “For example, selling farmland, either to relatives or unrelated parties, generally triggers capital gain taxes. But if it's held until death, there are no capital gain taxes but possibly estate taxes.”
It may also make sense to consider keeping the land and earning an income from rent, according to Jones. He stated that many non-farm investors have added farmland in their portfolio in recent years because of its return on investment and relatively low risk factor.