Something don’t add up

25 Oct

So help me out here. Math was never my favorite subject, but over the years I’ve managed to do some passable adding and subtracting.

Here’s what I just don’t get: 80 acres in Iowa sells for $21,900 per acre.  Man! And I thought some of the land up here in Minnesota was expensive (I’m sure some of the flat ground in the SW part of the state is very pricey).  But how on earth is anyone going to make money farming land that’s so expensive?

This leads to my arithmetikin’

Current price of Corn: $7.42/bushel.  (We’re optimistically assuming that prices will stay at their current near-record levels, though just a few short years ago, 2006 to be exact, they were $2.50/bu or so).

10-year Average yield of the best Iowa farmland: 180 bushels/acre. (We’re assuming here that the market is rational and that the highest-priced land is the highest-producing land).

So 1 ac * 180 bu/ac = 180 bushels of corn per year.

180 bu * $7.43 = $1337.40 of gross income per acre.

So we’re going to take it easy on the buyer (and me, looking up the statistics) and not even factor in the costs of production, even though Iowa State Extension provides them. I don’t know enough about the corn-growing game to parse the data they provide. At any rate, even if it costs us nothing to grow and harvest the corn, we’re left with:

$21900 (purchase price per acre) / $1337.4 (income per acre per year) = 16.37 years until the investment breaks-even.

For what it’s worth:

Seller, Henry Boelsma, a longtime Sioux County farmer, said he was “very happy” with the sale.

8 Responses to “Something don’t add up”

  1. bc October 26, 2012 at 7:33 am #

    [maths and cs degrees here]

    That’s a 6% return. You bring in costs and subtract something for risk and it gets way lower, but what are you getting at the bank? Half a percent in a savings account? Two percent in a special term deposit, but oh then I’m paying income tax on that gain which cuts it in half. I have no idea what US corn subsidies are but they might move the needle too.

    The table you list has county average yields. Maybe this farm has way above average yields. The table doesn’t show farm maxima, just highest of the averages in that ten years. It is still an average of the county. Maybe it’s an outlier that produces 40% more than the average.

    Productive land is a secure investment and that security is worth something. It is a great hedge against inflation, which is what the buyer might be looking for when they aren’t feeling confident about the economy. You put a million into the market you have a huge risk. You put it into the bank and if the economy tanks and inflation rockets you’ll lose there too. Farmland is like gold but it also gives an income. It is better than gold in that they can’t mine any more of it.

    Plus they might be betting on future price rises or yield increases. If the market changes they can switch to other crops. I think they’ll be safe if they bet on a population increase, too. Tax also might be a big consideration. The farmland might be a way to switch a high tax rate into a lower one, or a long term investment where you don’t get taxed on capital gain until the sale.

    But hey, maybe they just liked the lake and trees.

    • Andrew October 27, 2012 at 11:13 pm #

      Never thought about it as ROI before, that 6% doesn’t sound so bad. But then again, that’s dependent on some very volatile corn prices. What really worries me is the whole prospect of speculative investment in farmland. They made a passing mention of it in the article. Seems like that could be big trouble for some farmers who get over-leveraged in accumulating new land.

  2. boatbutter October 26, 2012 at 9:20 am #

    I saw a show the other day where a Jamaican guy was selling grass for $500/oz. Yes, ounce. I’d say ditch the corn!

    But there’s that whole getting shot at by gangsters and the cops not thinking dope is funny thing.

    But man…. $500/OUNCE!

    • Andrew October 27, 2012 at 11:16 pm #

      It’d take a lot of ounces at $500 a pop to build up a good lawyer fund and a good bullet-proof-vest fund. Maybe that’s why they all stick to corn and soybeans. But then again, after Nov. 6th Colorado might be a whole different story.

  3. Gordon Milligan October 26, 2012 at 10:27 am #

    Wow that’s some high priced ground. I know I can’t afford any crop ground in Iowa, its just to high. Good pasture ground is only around 3000 an acre around Lucas county, thats about the chepeast it gets, more in other parts of the state, it all depends on what part of the state you are in. I have been looking down in your old state of Missouri Andrew, there are some great deals there. I may have to rethink my location if I could just get my wife talked into it.

    Oh yea, boatbutter it wouldn’t take him long to recupe his money if he would plant pot on there, it would be worth the price then:)

    • Andrew October 27, 2012 at 11:18 pm #

      There are some really good deals in Missouri, but a lot of them are wayyyy out in the middle of nowhere. If you don’t mind driving an hour and a half to get to the nearest store you can find a suitable farm for cheap in Northern MO.

      • Gordon Milligan October 28, 2012 at 9:43 am #

        I am finding that out in my search. With the price of gas to keep going up we hope to get something closer to a town big enough to have all we may need.

        • Gordon Milligan October 28, 2012 at 9:54 am #

          I also worry about the market for farm ground might be overheating a little, kinda like the housing market did, a few years ago. There was a big farm market bust back in the early 1978, to the early 80’s that most of you guys are to young to remember. They say it is different this time because farmers are not borrowing as much to purchase the ground. We will see, with the value of our dollar keep getting less, I bet it will always be a good investment, The good Lord isn’t making anymore farm ground.

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