An increase in land values based on much higher commodity prices is not uncommon in agriculture.
If you add in another known, such as historically low interest rates, that drives it up more. While the Hilmar Cheese Company’s plans to build a $460 million manufacturing facility will create about 250 jobs in Dodge City, Kansas, it also affects agricultural producers. Land values are already much higher within a 30-mile radius of the community, said William “Bill” Glazner, a certified public accountant who works with Kansas-based Adams Brown CPAs.
Hilmar Cheese Company, which plans to open in 2024, has triggered a land rush for dairy producers who are shopping for large blocks of land in the region so they can supply milk to the plant, Glazner said.
He has seen prices as high as $7,000 an acre for irrigated corn ground. About a year ago that tract was selling for under $5,000 an acre.
“This is an unprecedented situation,” Glazner said.
It can mean opportunity for producers wanting to change their operations such as selling ground that is farther away from their base and using proceeds to purchase ground closer to the operation’s headquarters, he said. For the most part the higher land values are helping landowners and that may lead to additional renegotiations on lease agreements.
He also recommended that farmers stay patient and work closely with their accountants and trusted advisers.
For some growers the high values might be an opportunity to sell some ground and convert it into cash or another asset, he said. Understanding each market means a producer needs to do his homework. Values can quickly change at a rapid rate.
It is incumbent upon producers to do their own research and reach out to professionals who can help them, Glazner said.
Like all bubbles in agricultural sectors, what goes up will come down at some point so his advice is “to be very careful.” Producers do not want to be on the short end of making land payments based on today’s commodity prices and be cash squeezed if they tumble. Plus input costs are forecast to be higher in 2022 than what a producer might have locked into earlier this year, he said.
Producers who use farm management technology tools have found that investment can help them to make good decisions, he said.
The rhetoric also pushed potential changes to federal tax law under President Joe Biden that could push landowners to consider selling land sooner than they had planned. Glazner again said it was important to be patient and stay in touch with accountants and trusted advisers.
He said the likelihood of a change in the repeal of “step-up in basis rule” proposed by Biden in his American Families Plan does not seem to have the bipartisan support it needs to pass. Stepped-up basis has helped Americans who want to preserve their estate and help their heirs to continue to run the family businesses and farms. Biden’s proposal would change how the capital gains taxes are paid on estates and if approved by Congress it would change how the basis is defined and could significantly add to the heirs’ costs.
However, another provision is possible reform on the estate tax, in which heirs who inherit more than $1 million per person may face the unfortunate trigger for higher taxes if that provision pushed by Biden passes.
Glazner and his colleagues say that over many years a farm family is likely to show on paper its operation is worth more than $1 million, but it is an incomplete picture because there are so many variables that go into building and maintaining a farm and ranch. How capital gains are calculated can have unintended consequences particularly for the next generation in the family.
He advises clients to realize administrations and Congress frequently change.
“I caution against knee-jerk reactions,” Glazner said. Unfavorable legislation can be changed, he said, and reforms happen more often than people might think.
If the farm operator and family have no plans to retire in the short term, then his advice is not to overact. If the situation is in a short-term window, then his advice to the operator is to visit with their management team and financial experts right away.
Regardless of the size of the operation, farmers and ranchers need to take control of their own situations and should turn to experts who can help them to answer questions, he said.
