Saturday, November 24, 2012

Making A Farm Cash Flow

Yesterday we talked about how do you decide what you can pay for a farm.  I see the old Land Bid spread sheet is still available from Ohio State.  This is the program I used to help clients decide what to bid on a farm.  I have not "played" with it yet so someone let me know how it works for you.

How do you make a farm cash flow for purchase?  It all starts with net profit per acre.  From the link we can see the Ohio State University budgets calculate a $400 per acre return to labor and mangement for corn in 2013.  We assume the buyer as the ability to make this happen through his own efforts or through custom operators and advisors.

If the farm has been in soybeans the last year, it is easy for me to transition to notill corn.  This is exactly what a lot of my neighbor's fields needs, a rotation to corn for 2013.  Many farms will already be in corn and be ripe to go to notill soybeans.  This reduces cash expense and could be profitable for 2013.  From the link we see that soybeans can make us another $50 per acre with less cash expense.

This is only one year.  A farm mortgage is typically a 30 year mortgage so what about the other 29 years?  Farmers do not expect that kind of net income every year and I remember plenty where half that profit was about all I could milk out of the soil and marketplace.  So pick a figure you are comfortable to build a repayment schedule for your purchase.  There will be good years and bad but the purchase must cash flow.

There are so many other variables from farm to farm and person to person, you really need to be able to analyze the variabilities.  This is where a consultant like me with 40 years of experience can help with your decision making.  I am not advertizing myself but stating a fact.  It's taken me a lifetime to be able to do what I am talking about and trust myself to share my knowledge and experience with others.  There are many people out there with my experience who can help you.

Take a look at your personality, net worth sheets, ability to manage money, your past history and your potential to get a better handle on your ability to pay off your purchase.  I know now I could have done this 40 years ago but it's taken me a lifetime to get to a place where I feel comfortable in buying and selling land.  I was not taught this and it did not happen overnight.

The picture shows a farm with some CRP and woodland.  It will not return much profit, if any.  This is where your taste, needs, and financial ability to enjoy non-farmland come in.  If you have a big family like ours, a farm with all tillable land is not as enjoyable as a more diverse piece of land but it doesn't cash flow, either.

What questions do you haveWhat topics would you like to discuss?  This blog is here for you as much as it is for me.  I enjoy doing this stuff, I hope you do, too.

Ed

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