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Prairie Farmer - July 2007

Take the Guesswork Out of Land Bidding

Garrett Stoerger
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign

Purchasing that once-in-a-lifetime farm is something that many will dream of but few will ever realize. For some, that farm might never come up for sale. Others may find themselves unable to compete in a market flooded with 1031 dollars.

The entire process of buying farmland is an emotional one. It can be one of the most stressful events farmers face in their line of work. And while farmers see land as a way of life, many off-farm investors make the purchase as an investment — and if they can sell at a profit, they will.

Yet regardless of who you are and what your buying intentions are, you have to be able to pay for that land. Want to figure your maximum bid price? Try out the Land Purchase Analysis spreadsheet, one of the FAST Tools developed by University of Illinois ag economists for farmdoc. With it, you can evaluate the economic return of a farmland purchase and calculate the maximum bid price for that parcel of land. This Excel spreadsheet is available for download free of charge.

The calculation

If you are purchasing the land with intentions to farm or crop-share lease the acreage, you can click the “Cash budget” button and input your budgetary items on that sheet. You can allocate up to three different crops on the land and complete different budgets for each crop.

Afterwards, the model uses the resulting net cash flows. Conversely, if you're purchasing the ground to cash lease to another party, you can simply enter in your rental price.

The final step is to click the “Solve for maximum bid price” button. Once the simulation runs, a set of results will appear that include: profitability, return on investment and maximum bid price.

Time periods of five, 10, and 30 years are available for each set of analysis. The profitability section calculates the sum of net present values of future cash flows for the set time horizon. The return on investment portion is a calculation of the after-tax investment yield of the analysis price. And finally, the maximum bid price is just that: the maximum price per acre that an investor could pay in order to equal the specified after-tax discount rate.

The illustration on this page shows the cash flow needed in the first year to make the analysis price profitable at the given discount rate. For example, in a time horizon of 10 years and an after-tax discount rate of 5%, you would need to receive a cash flow of $277.32 in the first year to be profitable.

The Land Purchase Analysis tool provides a means of evaluating the economic return on a farmland purchase, as well as establishing a maximum bid price. This tool takes the guesswork and headaches out of time-consuming capital budgeting calculations.

If you are thinking of purchasing farmland anytime in the near future, head over to the farmdoc Web site and download the Land Purchase Analysis tool, user guide, and demo free of charge.

Stoerger is FAST coordinator with University of Illinois Extension.