Sunday, November 25, 2012
It worked just like it did 25 years ago. I remembered sitting down with farmers in the extension office and grinding out numbers from "what if?" questions. I also remembered really discussing and analyzing the terms learned in my agricultural economics classes at Ohio State. I remembered Professors Warren Lee, Himes and McCormick!
The eleven factors LANDBID ask for are:
1. Price of recent sales is a reasonable estimate of the fair market value of comparable quality farmland in the surrounding area. The model uses this value as the base for the future growth in land value, depending on the rate specified in factor 10 below.
2. Opportunity cost is the annual, after-tax rate of return you can receive on your equity in an alternate investment of comparable risk. A good benchmark for the minimum rate is the after-tax interest rate on a first mortgage loan plus a risk premium.
3. Planning horizon is the number of years into the future for which cash flow projections are desired. Typically, 10 to 30 years is used for long range forecasting. This value must be 30 years or less.
4. Net income is the anticipated annual net return per acre. It equals gross income less all fixed and variable expenses except land debt servicing expenses. The going cash rental rate minus property tax and other ownership costs is also a good estimate of net income.
5. Marginal tax rate is the rate at which the next dollar of net income will be taxed, including federal, state, and social security taxes. Consult IRS and Ohio income tax tables for current rates.
6. Growth in income is the average annual rate at which you expect net income to grow over the entire planning horizon.
7. Proportion paid down equals the down payment as a percent of the land purchase price.
8. Mortgage interest is the effective interest rate you will be paying the lender. Include the effects of closing costs, appraisal fees, stock, etc… on the effective cost of funds.
9. Loan amortization period is the number of years that it will take to repay the loan.
Standard terms are between 15 to 30 years. If the loan amortization period exceeds the planning horizon, the outstanding balance of the loan is repaid when the land is sold. This value must be 30 years or less.
10. Land inflation is the average annual rate at which you expect the land value to increase.
11. Capital gains tax rate is the rate at which any gain in value will be taxed upon the sale of the land.
Take some time and think these over. If there are any you would like to discuss, let me know. We could debate the future all day but we have to come to some agreement and conclusion before bidding on land.
One thing not to forget is soil test the farm before bidding! This is often hard to do but will give you a much better idea on the productivity of the farm and what you will need in expenses to meet your goals.
We will discuss soil test results again soon in a future blog. What's these woods worth to a grain farmer?