JOELLYN BUCKMASTER OF LANSING, IA, didn't sleep the night before the auction. “I watched the World Series and saw the clock every hour last night,” says Buckmaster the next day over pie at Crossroads Restaurant and Lounge in Early, IA. “It was tougher than I thought it was going to be.”
Buckmaster, along with her mother Shirley Ward and sister Julie Lehner, had just sold three parcels of land totaling 480 acres that had been in the Ward family for years. The land was an investment and an insurance policy for the family. Buckmaster was the fifth-generation owner. Her kids would have been the sixth. “So it was hard to sell,” she says. “Really hard to sell. And it was an emotional time for my mom, too.”
But both sisters and their mom had other investments they wanted to pursue at this point in their lives. And with land prices approaching all-time highs, they decided it was a good time to sell.
The selling price of the three parcels averaged $3,535/acre. The price was well above the $575/acre they originally paid. “We were pleased,” Buckmaster says.
An estimated 30% of the farm's value was the direct result of land improvements the Ward family made under the advisement of their farm manager. The Wards converted the land from a livestock farm to row-crop production by adding tiling, terracing and sodded waterways and by clearing out old buildings.
As the Ward family's experience shows, investing in land improvements can increase the value of your largest asset. And it is especially important this year, because farmland is selling anywhere between $2,500 and $4,000/acre or more. “With the cost of land going up, whether you are buying or renting, you need to improve the land's productivity to generate more annual income,” says Dennis Reyman, accredited farm manager (AFM) and accredited rural appraiser (ARA) with Stalcup Agricultural Service, Storm Lake, IA. “And in turn, by increasing the land's productivity, you will increase its value.”
What the Wards did
“Quite a few things occurred over the 30-some years that we've been around the Ward's land,” says the family's farm manager Terry Argotsinger, Stalcup Agricultural Service. He explains that when the Ward family purchased the land, it was a livestock farm with a lot of interior fences, pasture, a ravine, and rolling land that had not been protected. The land was improved with grassed waterways and a tile line system to carry water underground and drain the hillsides. Contour lines were laid, and the land was farmed on the contour to prevent erosion. Terraces also were formed to protect steeper slopes.
Old dwellings and buildings that were past their useful life were removed to reduce liability and hazards. That land was then brought into row-crop production. Finally, five grain bins with a 40,000-bu. capacity were constructed to make harvesting efficient and marketing more flexible. These improvements not only increased the value of the land but also generated annual increases in income resulting from the crops raised on it.
The changes the Wards made on their farm may not be the same ones needed on your land. Different farms will have different priorities based on their region and condition. That being said, Argotsinger says the one single improvement that can bring the highest return on investment, on average, is tile drainage.
“If a client said, ‘I have $20,000 I want to invest in my farm, and if the choices are between building a grain bin, bringing my pH and fertilizer levels up or putting tile in wet soils, where do you suggest I invest,’ my first answer would be tile,” Argotsinger says. “After that you have to make some agronomic and economic decisions based on where you are at this point.”
For example, if soil tests show that fertilizer levels are within 10% of optimum conditions, then the margin of return for getting the last 10% would not be as great as the return on storage. In that case storage would take precedence. On the other hand, Argotsinger says, if the soil tests show low phosphorous readings and a 5.2 pH reading, then he would recommend improving fertility first. “But the priority will all depend on each farm's individual needs,” he says.
Tile tops list
On flat ground that is prone to flooding, the improvement with the highest return on investment is tile drainage. Such land exists throughout much of the Corn Belt, where many farms are already tiled. Tile drainage provides an underground escape for water to prevent standing water from impairing crop growth. Systematic tiling, where tile is installed every 60 ft., provides the best drainage, but partial tile also can be beneficial.
Tiles cost around $400/acre to install. However, tiling can provide up to a 20% return on investment, according to Argotsinger, “so in five years, you'll get it all back.”
However, the economic law of diminishing returns applies to tile. And the return rate will vary according to which areas need it most. “In other words the wettest areas of a farm are probably already tiled,” Argotsinger explains. “The return is great and probably paid for itself in the first year. The next wettest area may be tiled but takes two years to pay for itself, and the next three years, and so on.”
In areas where adequate drainage greatly improves productivity, a systematically tiled farm can bring $300 to $500 more an acre over a farm that is not tiled, according to Jay Van Gorden, AFM with Farmers National Company, Irwin, OH. Partial tiling could increase land value $100 to $200/acre.
“Tile, tile, tile,” agrees James Hanna, AFM of Halderman Farm Management in Wilmington, OH. “Even with higher oil prices causing tile prices to climb, drainage is still a good investment.” Hanna is advising his clients to do more tiling or repair existing tile where needed.
Nutrient levels rank second
Running a close second in value to tiling is ensuring adequate nitrogen, potassium and phosphorous levels. “With today's high yields, the nutrients required to produce a large crop warrant a good look at soil fertility,” Hanna says. He advises farmers to conduct frequent soil tests to see where more fertilizer is needed.
According to Van Gorden, proper fertility can add $200 to $300/acre to land value.
Although maintaining adequate levels is important, it is equally important not to overapply nutrients, reminds Jeff Berg, ARA with Crown Appraisals, Barnesville, MN. “Otherwise, you risk losing the applied fertilizer during the first heavy rain,” he says. The runoff in turn can pollute rivers and lakes. If levels are too high, refrain from adding more fertilizer and plant crops that will use up the surplus.
Retain soil and organic matter
On hilly ground, which constitutes much of the Corn Belt, erosion may be a bigger issue than drainage. Conservation methods can prevent this problem. These include using sodded waterways, conservation tillage and contour farming.
Terraces also can reduce erosion. But they are not as popular as they once were, Berg says, due to the difficulty in maneuvering today's larger equipment. What's more, terraces can be viewed as a detriment if used in an area where terracing is not an accepted practice.
An improvement related to controlling erosion is maintaining organic matter. “Removing residue after harvesting corn for grain or chopping off all the stalks for corn silage year after year will eventually mine the soil of all organic matter,” Berg warns. “This, in turn, will hurt the soil's ability to hold water.”
As a result, Berg recommends no-till or conservation till methods that maintain a certain percentage of surface residue. These tillage methods are especially important in sandy soils, where organic matter is vital to retaining moisture.
Keep up appearances
One of the most overlooked areas of value is a farm's general appearance. Purchasing farms involves an emotional element in which personal interpretation plays a role. “Perception is reality,” Van Gorden says. “In other words, if a person perceives a farm is worth less than another based on eye appeal, it will reduce the buyer's willingness to pay a certain price for it, even if both farms are equally productive.” As a result, farms that are not maintained may sell for less than those that are kept up.
To improve a farm's appearance, owners should keep buildings and fence lines painted, repair roofs, take out old fence lines and remove junk. Old, outdated buildings should be taken down. Once removed, the buildings should be taken off real estate records and insurance policies to lower payments.
Owners should ensure there are no environmental hazards on the property. “Proper disposal of chemical containers, for example, is very important,” says Royce Elker, ARA with AgStar Financial Services, Mankato, MN. “Underground storage tanks and abandoned wells also could pose problems.”
Marginal farmland that is difficult to improve may have more value if used in other ways. “Farming is so competitive right now that it is hard to farm marginal land and come out ahead,” says Rick Hauge, ARA and accredited land consultant in Redwood Falls, MN. “Your input costs are about the same whether you are farming a well-drained farm or a poorly drained farm, yet your returns will not be equal. So if you have marginal land, it pays to look at alternative uses.”
For example, marginal land can be enrolled in conservation reserve programs. One such program is the Wetland Reserve Program (WRP) created in the mid 1990s to reclaim wetlands. This federal program provides for temporary (30-year) or permanent easements of land that is hard to drain and prone to flooding. The Conservation Reserve Program (CRP) is another federal program developed in the mid 1980s. It targets highly erodible land and sandy soils subject to wind erosion. More than 20 such state and federal conservation programs exist, Hauge says. To determine whether your land qualifies, contact your local Natural Resources Conservation Office.
Building sites are in demand, depending on location, according to AgStar Financial's Elker. The value of the site depends on how close the property is to a larger community, legal and physical access, view and other amenities. Sites with mature trees or along a ravine have been in great demand.
Rural residences and part-time farms also are in great demand today, according to Elker. Oftentimes these farms are purchased for residential living only; that is, both husband and wife work as wage earners. “So when purchasing ‘farms,’ the buyers are looking for a home in good to very good condition,” Elker says. “Outbuildings are of lesser concern to those buyers, although pole sheds and machine sheds are desirable. Older barns in good condition have aesthetic value as well as a place to house a horse or two.”
In some cases buildings can be a detriment. “For example, if a house is in a very rural area, it may not hold much value,” says Stalcup Ag's Reyman. “And a lot of times, it is not profitable to rent out.”
Another downside of having buildings is if the buyer wants the land for agricultural production. “Farm buyers want the land but don't want the buildings that go with it,” Reyman says. “That is a headache to them.” Most farm buyers already have a headquarters operation and do not need an extra building site.
In those cases, Reyman advises landowners to survey off the farm site acreage and sell it separately from the farm ground, assuming the buildings are in good condition and close to an urban area. “Usually you will get more selling it that way,” he says.
High premium payoff
Improving the value of the farm goes hand in hand with profitability. “The same things that improve value also improve productivity on the farm. And since farmland values are strong, the higher-quality farms can sell for large premiums,” Van Gorden says.
As a result, he recommends updating farmland in all of its phases — from repairing tiles to maintaining fertility and general appearance. “Don't fall asleep paying attention to your largest asset,” Van Gorden says. “Because if you don't pay attention, no one else will.”
Beyond the basics
Five details that may make or break a land deal.
Once you make the major improvements to your land, then the following finer details come into play:
On-farm grain storage
On-farm storage gives you flexibility in marketing your grain. However, its relative importance depends on the condition of the grain bins and where they are in relation to your markets.
The value of machine sheds depends on their condition, size and location. “A lot of these sheds were built 20 or 30 years ago and are too small for the machinery being built now,” says Dennis Reyman, Stalcup Agricultural Service. In addition, if they are in an isolated area, thieves can break into them. Large, modern machine sheds have good value, especially if they are located on the edge of town.
While there is little you can do about your farm's location, farms within a five-mile radius of a ready market have an economic advantage over farms that are farther away.
Road access must be adequate for today's large equipment. Crossings, lanes and entrances need to be able to handle grain-hauling equipment and large trucks.
Keep good records
James Hanna, Halderman Farm Management, advises farmers to improve their current acres before expanding the purchase of more acres that need work. “Ditches, waterways, tile and soil fertility are all areas to keep improving upon,” he says.
Once you make those improvements, keep good records to show potential buyers. Such records include tile maps that show when and where tile was installed, soil and yield maps, feedlot permits, and dates of building construction and renovations. According to Jay Van Gorden, Farmers National Company, grid-sampled farms with good soil test records can add $200 to $300/acre compared with farms with no documented history.
Jeff Mentzer of Early, IA, bought 160 acres of the Ward farm under the 1031 tax-deferred exchange, a section of the IRS tax code. It allows landowners to sell a property and reinvest the proceeds in a similar property to delay the burden of capital gains tax. “I own ground right next to here,” Mentzer explains. “So I sold land I owned farther away and traded into this farm so it is closer for me to farm.”
Owners are able to sell property, especially property close to development, for large prices and buy larger tracts without having to pay federal taxes, according to Jay Van Gorden, accredited farm manager with Farmers National Company, Irwin, OH. He says in the past few years the program has driven up land prices in Ohio, where most parts of the state have seen a massive growth in development.
Royce Elker, accredited rural appraiser with Ag Star Financial Services, Mankato, MN, sees the same price hikes happening in his state. “Farmers who own land on the urban fringe are using the 1031 tax exchange to reinvest their proceeds to avoid capital gains tax,” Elker says. “They are looking all across the state for land and bid on land ‘outstate’ where they compete with local buyers.”