Recently, I had a member of Maryland FarmLINK call me to protest about the price of farmland that she thought I was posting. She said bluntly, “How do you expect farmers to pay those prices and make a living?” I responded that I don’t post properties for sale, realtors/owners do, but I appreciated her frustration. Many of the farms posted on Maryland FarmLINK are absolutely beautiful, and most are out of reach for buyers who hope to make a living farming.
For example, consider a farm priced at $1 million. With a down payment of 20% and a 6% fixed 20-year mortgage, the buyer can expect to pay approximately $6,800 per month and $81,600 per year. No beginning farmer would ever be considered for that kind of loan and most experienced farmers (without major off-farm income) would know better than to ask.
Sadly, for those who wish to buy land to farm, most zoning regulations allow many non-farm uses that compete with real farmers when farmland goes up for sale. Non-agriculture uses can drive land values up far beyond the revenue that can be generated from a typical working farm. In its report, Trends in U.S. Farmland Values, the Economic Research Service of the USDA studied farmland values near urban areas. If multiple lots are allowed by zoning, land owners can expect a 30% to 40% price increase over just sold as for farming. Most zoning ordinances also allow cemeteries, golf courses, junk yards, schools, and other non-agricultural uses in farming zones, which can also drive up the price of land. In addition, wealthy residents of urban areas are often attracted to the notion of having a rural estate in a bucolic setting. They can offer contracts too high for farmers to compete.
And farm owners can’t be blamed for asking what the market will bear for their farmland. Those not passing the land on to the next generation view their land as their retirement plan since the equity they accrue is similar to an investment in the stock market. In addition, some have built up value-added businesses such as wineries or dairies, and the infrastructure justifies a higher price for the farm.
How much can a farmer afford to pay?
According to the USDA report, “At the most basic level, capital asset pricing theory posits that farmland values are derived from the expected stream of returns that can be earned into the future by having the land in an agricultural use.” The report goes on to say that “The farmland rent-to-value (RTV) ratio, calculated as the cash rent per acre divided by the land value per acre, is a proxy for how quickly an asset will pay for itself. . . if agricultural rents were the sole source of returns from farmland, the farmland would have paid for itself in about 14 years in 1951, but would take more than 33 years in 2007.”
Why bother to post expensive farms? How does it help farmers?
Sooner or later, someone will buy the farms and chances are most will not farm the land themselves. However, it is in their interest for the land to be farmed. Most states, including Maryland, tax farmland based on its agricultural value, rather than its market value which is much higher. As such, farming provides a significant savings in property taxes. How can farmers connect with new farm purchasers to gain access to land?
One approach for farmers who want to lease land would be to prepare their own promotional packet and share them with realtors who sell farmland. That way, realtors could help to match new farmland owners with farmers who meet their land stewardship objectives and crop production desires. Mount Vernon Farm and Water Penny Farm in Virginia are great examples of how farmland owner/managers can provide great opportunities for beginning farmers.
Along with Mae Johnson, MD Department of Agriculture, and Paul Goeringer, Department of Agricultural & Resource Economics, I have been teaching realtor classes across the state. We have been letting them know about the issues and challenges that farmers are facing in getting access to land and working the land. Realtors have always been a valued resource for farmers seeking to buy farmland. Using Maryland FarmLINK, we believe that they can be a resource for leasing the land that they sell, when land owners are looking to find a farmer to work their land.
Farmers, if you can afford to buy the farms posted for sale, the USDA report indicates that they can be a good investment, even if the farm business plan doesn’t justify the purchase price. If you cannot afford a farm posted for sale, maybe there is a way for you to lease it!