Cash flow should guide farmland renting versus buying 

With farmland values at historically high levels and farm income under pressure, producers weighing whether to rent or buy additional acres must look beyond land prices and potential appreciation to determine what their operations can afford. 

Brian Briggeman, an agricultural economics professor at Kansas State University, said cash flow should be the starting point for evaluating whether to rent or purchase farmland. Producers also need to consider their financial position, long-term growth plans, borrowing capacity, and the stability of their relationships with landowners. 

What is pushing farmland values? 

Farmland values across the United States have reached historically high levels when adjusted for inflation, Briggeman said. The increases have continued even as net farm income has tightened, creating challenges for producers considering expansion. 

The supply of farmland remains relatively fixed, while demand has stayed strong. Farmers are the primary buyers, Briggeman said, and the limited number of properties available for sale can intensify competition when land comes on the market. 

“If an acreage comes up for sale, that may be the once-in-a-lifetime opportunity to buy it because it’s a really thin market,” Briggeman said. “That really adds to the demand and pulls prices up.” 

Government payments also have contributed to farmers’ purchasing power. Briggeman pointed to research by his K-State colleagues examining payments made during the trade dispute with China. The research found that some payments exceeded the estimated market disruption. 

When government payments exceed losses, some of the additional funds can support farm expansion, Briggeman said. Larger operations with a growth-oriented strategy may use that money to bid on farmland, adding to demand. 

Low interest rates in previous years also made borrowing to purchase land less expensive. Although interest rates have increased, the combination of strong demand, limited supply and additional financial support has helped sustain land values. 

Renting can support expansion 

For farmers building an operation, renting can provide a way to expand acreage without taking on the debt required to purchase land. 

Briggeman said renting additional acres can be one of the best ways for younger farmers to grow their businesses. Producers can increase the size of their operations while preserving the opportunity to purchase land when their financial position allows. 

“We’re in a period where there’s a lot of farm ground that is currently owned by landowners 75 years or older, and that’s going to start changing hands,” he explained. “They’re looking for good farmers to come in and farm that ground.” 

But renting introduces a different set of risks. Farmers do not control whether a landowner will continue leasing a property, and uncertainty about future access can complicate decisions about machinery purchases, labor and other investments needed to cover additional acres. 

Before signing a lease, producers should consider its duration, whether the agreement is reviewed annually and the landowner’s plans for the property. Those factors become particularly important when an operation is making long-term investments based on rented acreage. 

“If I start to add additional amount of machinery or labor in order to support this extra ground I’m bringing on, how confident am I I’m going to be able to continue to farm that rented ground?” Briggeman said. 

Maintaining a strong relationship with the landowner can help reduce uncertainty. Briggeman said farmers should understand how involved landowners want to be, communicate with them and make sure both parties are treated fairly. 

Farmers who have rented from the same landowner for years and demonstrated responsible stewardship may also have an opportunity to purchase the property if it eventually becomes available. 

Briggeman said those conversations can develop over time as the relationship grows. Farmers can ask about the landowner’s long-term plans and whether there may be an opportunity to buy the property in the future. 

Buying builds equity but requires financial strength 

Purchasing farmland requires a larger financial commitment, but ownership can contribute to an operation’s long-term financial position. 

Briggeman said producers evaluating a purchase should consider its net present value, including both the income generated by the land and its potential appreciation over time. Land can build equity that supports future borrowing and provides additional financial flexibility. 

However, the expected benefits must not eliminate the need to cover annual debt payments and operating expenses. 

For younger farmers with limited assets and substantial borrowing needs, purchasing high-priced farmland can create significant financial pressure, particularly during a downturn. More established operations with stronger balance sheets may be better positioned to manage the same investment. 

“If I’m going to buy it, I’m buying it as a long-term asset,” he said. “A lot of times, when you run those numbers on a net present value basis and look at not only the amount of income that comes off of the farm ground, but also the price appreciation, you know that that could be some real equity that could be added into the farming operation.” 

Owning land also requires producers to evaluate expenses beyond the purchase price and mortgage payments. Property taxes, maintenance, insurance, and other ownership costs should be included in financial projections. 

Briggeman also recommended examining the property’s mineral rights, water rights, easements, and physical condition. Producers should understand any restrictions or other factors that could affect how they use the land. Those considerations are especially important when a purchase represents a substantial share of an operation’s available capital. 

Stress-test the numbers 

One of the biggest mistakes producers can make when considering additional acreage is assuming their initial financial projections will hold, Briggeman said. 

“You need to stress it. I just think we need to do our due diligence in considering that worst-case scenario and running different numbers,” Briggeman said. “Whether it’s expanding through renting or buying, you can put together numbers and pictures that will look great and kind of convincing, but you have to step back and say, ‘Well, what’s reality? Like, how low or how bad can things get before this would really stress my operation?’” 

A purchase that appears profitable under average conditions may become difficult to sustain during a poor production year. The same is true of a rental agreement with a fixed payment that remains due regardless of crop performance. 

Farmers also should consider how much debt their operations can support and whether they have sufficient financial reserves to manage losses. Briggeman said the right decision depends on where a producer stands in the business life cycle and the strength of the operation’s balance sheet. 

For a younger farmer who has not accumulated substantial equity, buying land during a period of high prices can be particularly difficult. An established farmer with more financial resources may be able to manage the risks and benefit from the equity associated with ownership.  

During difficult years, land equity can provide additional borrowing capacity when farmers need financing to manage cash-flow challenges or to expand their businesses. However, ownership only provides that financial flexibility if the operation can afford the purchase and service its debt. 

“Right now, a lot of farmers are having to have conversations with their lender about borrowing money to get through this difficult time and term out some of these losses.” 

Ultimately, Briggeman said, farmers need to determine whether additional acreage strengthens their operations financially rather than assuming ownership is necessary for success. 

“I think owning land is a sense of pride, and it’s a way to really grow your operation and gives you access to, you know, equity that you can borrow against and could be part of your growth strategy,” he said. “But at the end of the day, you got to make a cash flow.” 

Lacey Vilhauer can be reached at 620-227-1871 or [email protected].