January 7, 2019 1:22 pm
$11,900 per acre / $1.27Million
Would you bet the farm? A land auction’s effect on your dinner!
Recently (between Thanksgiving and Christmas), a once in a lifetime opportunity presented itself to us and our fine neighbors. A land auction. A family estate was being settled and the heirs, long gone from the actual farmwork, wanted to cash-out. About 2% of land in Illinois changes hands per year and one of the common—and certainly most “exciting”—transactions is the public auction. Now in this take of Farm & Food, let’s connect what a land auction means for your food.
Four fields sold, about 477 acres—an acre is the size of a football field. The lowest farm sold for $8,100 per acre and the highest sold for $11,900 per acre. In total, the estate sold for $4.85 million! :0
I knew some of the buyers and they’re great farmers. If you can get past the stickershock, it probably is a great investment in their family farms, especially if you look at it as a 25-100 year investment. Heck, if we were selling (A LOT) more of our #AwesomePopcorn in more stores, I would’ve looked pretty hard at these farms as great investments for my children…
But what does this mean for your food? How does a land auction affect your dinner plate?
First, land is the largest capital expense on the farm. It’s NOT cheap because, as many Ol’ Timers will state, “They aren’t making any more of it!” And that’s true! It takes ~10,000 years to make 1” of fine, black, topsoil. So the price of land matters greatly for the profitability of any farm. If you can’t buy it, you’ll need to rent it. So you either pay the bank and eventually (HOPEFULLY!) own it yourself, or you pay someone else who had the cash to make the purchase.
Second, that farm probably represents a disproportionate amount of the assets in a family farm. While it’s more common today for farmers to have retirement accounts like most folks, land typically ends up being a nice retirement fund if the debt is ultimately or nearly paid off. That effects how and when the next generation takes over the family farm. More on that later.
Third, and this is most important, your food comes from farmland. Well, that’s pretty obvious—duh. But the value of the land directly and indirectly dictates how that land will be farmed—specifically, what crops and practices may be deployed.
Land prices are complex, sharing interactions with the stock market, interest rates, commodity/crop markets, and logistics (to say nothing of the idiosyncrasies of individual farmers—yours truly included!). But let’s summarize so you can connect the dots between a farm like ours and your food.
- Higher prices mean that there SHOULD be better opportunity for generating profit.
- Land costs are the largest expenses paid by a family farm.
- Higher costs tend to mean higher risk and thus, a driving force to reduce risk where possible.
So what? Why would you as a consumer care?
Higher land prices should mean more profit and, naturally, more risk. Since land is often held as a retirement asset by the older generation, the younger generation more likely to try new things is somewhat constrained (no, they’re not slaves or unable to think or make decisions—but the older generation isn’t going to allow too much risk to enter the family farm either). Thinking this thru, what would you do as a farmer? For simplicity, you’ve got two options.
OPTION 1: Cut the Risk
You could grow something with a well-defined market. A market where you have lots of resources from public universities, research from large agribusinesses, get paid timely and easily, and where you have futures markets to hedge (i.e. offset) long-term price risk.
OR
OPTION 2: Seek the Reward
You could grow something unique. You would make lots more money but will have lots more risk. It would be a market where you had far fewer resources, limited research from universities or private companies, get paid only when the market was “open” or as you “made-the-market” hustling to make sales, and had no long-term price risk tools.
The first option, is a generic version of US agriculture’s production of big commodities. Think corn, soybean, cotton, wheat, milk, cows and pigs. I’m generalizing here, so if you’re a farmer reading this, don’t throw your popcorn at me just yet. It’s still hard work for sure and certainly a wonderful way to raise your family farm.
The second option is really where, in my opinion, the consumer wants farmers to be. Organic production or special production methods. Niche products and direct marketing cutting the middlemen/women from the equation. It’s an over-generalized version of what we are trying to do with our #RusticRed and #BlueBounty popcorns as well as our organic acreage.
Neither option is inherently bad…Let’s skip the debate on organic/conventional and ag-policy/subsidies for now—there are good arguments and good people/farmers on both sides of those issues. The point is that the second option favors what the consumer wants while the first option favors what the consumer is willing to pay (and where the farmer has less risk).
Bottom line: the higher the land price (read cost), the more risk. And at $11,900 per acre, there’s too much risk in the system for farmers to respond instantaneously to consumer’s wants and needs. We’ve lost money every year in our field that is transitioning to organic. It’s nauseating to think that we’ve made a profit on all the other acres under Option 1, but been beaten senselessly by Mother Nature and market prices on the organic acreage under Option 2. Still, Option 1 doesn’t seem to offer the same challenge or reward for the next generation. That’s one reason we’re not locked and loaded into just one option for all acres.
So, land auctions do affect your dinner plate. Interesting food for thought huh? Incidentally, anyone looking to diversify their retirement income into 80 acres of fine, Illinois soil can shoot us an email! Only $1.27M to become part of our (extended-)#FamilyFarm
Lucky for you, we’re trying to increase Option 2 relative to Option 1 on our farm and it means you’ve got some #AwesomePopcorn that is great for #MakingMemories. We’ll worry about the land cost, just sit back and enjoy the bounty of our #FamilyFarm.