Buy or Rent in 2008?
Your financial position will largely determine which option is best for you.
When Curtis Rowan sees good-quality farmland priced as low as $300 per acre, he knows producers will be buying this winter.
"In western Manitoba and southeastern Saskatchewan, you're seeing farmland prices between $300 and $1,000 per acre," says Rowan, RBC Royal Bank account manager in Brandon, Man. "Prices are
slowly but steadily rising after some difficult years with BSE and frost."
The economic rationale for producers expanding their land base is well-known. By spreading fixed costs over more acres, these fixed costs are reduced on a peracre basis. Reducing fixed costs per acre lowers the producer's breakeven point and thus can increase profitability. The
question is, is the producer better off buying the land or renting it?
"Most of my clients prefer to own the land they farm, but many others do well by renting or leasing most of the land," says Rowan. "It really boils down to personal preference and the individual's financial position."
Start with your balance sheet
Rowan's first step is to work with the client to determine how strong a land-buying position they're in. He begins by analyzing the producer's current debt position and their ability to pay a long-term obligation.
The producer's cash position enters the picture, too. On a purchase of farmland, Rowan will advise the producer to make a 35 per cent down payment. A 160-acre parcel going for $500 per acre will require $28,000 in cash for the down payment. (In other cases, up to 100 per cent
financing could be available if other land is pledged as security.)
With the remainder of $52,000 to be financed, the producer's cash flow is the next point for discussion. Can it service the new liability, along with some wiggle room in case of short-term setbacks or an increase in interest rates?
Assuming the balance sheet, working capital and cash flow are favourable, the producer can be land-shopping in no time. And with prices in his area seeming reasonable, Curtis Rowan believes the time could be right.
"To me, when I see $300 per acre around here, that looks cheap," he says. "Without question, there are good opportunities out there for producers with good working capital and manageable debt levels."
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