Keep Focus on Total Return

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Managing Land for Annual Income and Long-Term Appreciation
By Tyler Krug

The expectations of today’s farmland owners continues to increase. Not only are they expecting top-dollar annual income, they also require their farmland to be managed and operated in a socially responsible manner with sustainability, conservation and water quality issues being actively addressed.
And they want documentation showing steady improvement.

As of 2012, non-farmer landowners held 60 percent of Iowa’s farmland, up from 45 percent in 1982. Statistics and trends in other states are similar. Within this segment of investor-owned farmland, we have recognized a distinct trend of increased expectations for financial return, responsible operational excellence, conservation of their farm’s soil, and protection of the long-term productivity of their asset — all with on-going evidence and documentation.

Bill Northey, Iowa’s Secretary of Agriculture, uses an analogy of two used pick-ups to describe this trend. The first truck seems to run okay and be reasonably priced, but that’s all you know. You don’t know the mileage and haven’t been allowed to look under the hood. The second truck drives perfectly, has complete records showing an impeccable service history, the mileage is low and it looks almost new under the hood.

Historically, much of the managed farmland has been similar to the first truck and all the landowner knew, or was interested in knowing, was the rent. Today, it’s the second pick-up that landowners expect — rent, yield history, soil test, fertilization records, soil loss controls and more.
The obvious challenge for a land manager is that maximizing present income and maximizing asset value can be considered opposing goals. But this is short sighted. The average total return to Iowa farmland from 1970 to 2012 has been approximately 13 percent, with more than half of that return from appreciation.

Our philosophy is to recommend strategies that drive both income and appreciation, while showing the landowner a detailed cost-benefit analysis and providing an action plan for accomplishing the goals.
One striking example is that of soil loss. On a moderately sloping farm with typical crop management practices, a loss of three tons of topsoil per acre, per year is considered a moderate loss rate. A dump truck holds about 15 tons of soil so at a three-ton loss rate that would be a dump truck full of topsoil spread over five acres — which is a very thin layer of soil. But, on a 160-acre farm with 150 acres tillable, it would be 30 dump trucks of soil lost annually. That thin layer of soil loss is no different from 30 dump trucks showing up every spring, filling up with your topsoil and driving off.
And with that soil goes nitrogen, phosphorus and other nutrients that have been paid for. If you are like me, you become much more passionate about soil conservation when you imagine 30 dumps trucks coming off every year rather than that small fraction of an inch of soil being lost.

Addressing and documenting land management decisions is crucial. An innovative management plan focused on the most meaningful conservation practices, along with critical analysis available from precision production data, allows for the collection of a top-dollar rental rate and supports a premium price when it’s time to sell.

Key management points include:

-Employ methods to document improvements in soil health, fertility and productivity.
-Use today’s incredible precision technology to capture and analyze data; and optimize inputs.
-Implement a nutrient reduction strategy to improve soil health, increase organic matter, improve water quality, increase yields and reduce production costs.
-Document cost-benefit of soil loss reduction strategies.
-Utilize programs such as CRP (conservation reserve program) to improve farm profitability and value by removing environmentally sensitive acres from crop production.
-Increase yields through targeted tile drainage.
-Utilize and enforce farm leases that address fertility, conservation and stewardship requirements.
-Improve “curb appeal”

In summary, the comprehensive strategies, best practices and innovative tools work hand-in-hand to improve yield, reduce operating costs and increase the farm’s relative value — securing the goals of premium rent and maximum appreciation.
At Peoples Company, the most important input in our equation is the identification of those innovative farmers that understand these principles, and have exhibited the initiative to operate using these best practices. Those farmers that can consistently be part of increasing a farm’s productivity and value will have tremendous opportunity to tap into the trend of increasing investor-owned farmland and expand their business via leased land.

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