Is leased land the future for most beginning farmers? Is that a bad thing?

Is leased land the future for most beginning farmers? Is that a bad thing?

At a recent Future Harvest event in Baltimore County, Marilyn Anthony, Executive Directorfields of Lundale Farm in Pennsylvania, raised the notion that the future for farming may be “land lease” rather than “land ownership.” Her reasons were simple and compelling. First, most beginning farmers have not grown up on a farm, so they are not inheriting land.  Second, land in the region is quite expensive.

My initial reaction was reluctant acceptance. Historically, farmers have owned land in Maryland, except for farm tenants who never seemed to fare very well. However, Marilyn painted a rosier picture for farmers who lease land today. She cited a university study which reported that the accumulated equity for beginning farmers who lease land by year 10 was more than twice the amount of the accumulated equity of beginning farmers who owned their land over the same 10-year period.

questionNearly half of all farmland in the U.S. is leased. The advantages of leasing land include more working capital and the flexibility of changing the size of operation. The disadvantages include the uncertainty of renewal of the lease and lack of needed facilities such as irrigation, fencing and storage buildings, although sometimes this issue can be addressed in a written long-term lease. Sample lease documents are available at here.

The advantages of land ownership include the added legal control of the land, having the land as loan collateral, pride of ownership and hedging against inflation (assuming that land increases in value). The last ten years yielded a different result. Most farm owners lost land  equity in the Great Recession, but that is not the norm.

The disadvantages of ownership are the effect on cash flow (tied up in mortgage and tax pumpkinspayments), less working capital and limits on size. And unless one or more members of the family work off-farm, the farm family income may not cover land purchase costs and living costs, particularly when the farm is just getting started.

For example, at the average value of Maryland farmland ($7,500 per acre), a 25 acre farm, with no house or improvements, would cost roughly $200,000. At  a very low 4% interest, a 20-year monthly mortgage would  be just over $1,200 per month or $14,400 per year. Compare that with fixed lease rates of say $100 – $200 per acre per year. The difference between the lease cost and mortgage payment can be used to grow the farm business.

For many beginning farmers, land purchase is simply not an option. They do not have the down payment and enough farming experience to purchase the smallest farm. Those who have built up some cash for a down payment and have at least 3 years of farming experience may be able to choose between purchase or lease, particularly with loan programs available to farmers. Even if they are eligible for loans, they may want to compare lease-vs-purchase options in their business plan before  making a decision.

 

 

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