Cash flow, not land prices, should drive the rent-versus-buy call

US farmland values have hit historically high levels in inflation-adjusted terms while net farm income tightens, and Kansas State University agricultural economist Brian Briggeman says that gap makes one question urgent: can your cash flow carry the acres, whether rented or bought?

Land price and potential appreciation are the wrong starting point, Briggeman argues. Producers should begin with cash flow, then weigh their financial position, long-term growth plans, borrowing capacity and the stability of their relationships with landowners.

What is pushing farmland values so high?

Supply is essentially fixed. Demand is not. Farmers remain the primary buyers, and so few parcels come to market that competition gets fierce whenever one does.

"If an acreage comes up for sale, that may be the once-in-a-lifetime opportunity to buy it because it's a really thin market," Briggeman said. "That really adds to the demand and pulls prices up."

Government payments have also boosted purchasing power. Briggeman pointed to research by his K-State colleagues on payments made during the trade dispute with China, which found some payments exceeded the estimated market disruption. Surplus funds, he noted, can support expansion bids by larger, growth-oriented operations.

Cheap borrowing in previous years did the rest. Rates have risen, but the combination of strong demand, limited supply and extra financial support has kept values elevated.

Why renting suits growers building an operation

Renting lets farmers add acres without the debt load of a purchase, and Briggeman calls it one of the best routes for younger farmers to grow.

"We're in a period where there's a lot of farm ground that is currently owned by landowners 75 years or older, and that's going to start changing hands," he said. "They're looking for good farmers to come in and farm that ground."

The catch: you don't control the lease. Before signing, producers should nail down its duration, whether it's reviewed annually and the landowner's plans for the property. That matters most when machinery and labour are being bought to service the rented ground.

"If I start to add additional amount of machinery or labor in order to support this extra ground I'm bringing on, how confident am I I'm going to be able to continue to farm that rented ground?" Briggeman said.

Long relationships pay twice. Farmers who've rented responsibly for years may get first crack at buying the property, and Briggeman suggests asking landowners about their long-term plans as the relationship develops.

What does buying actually require?

Financial strength, mostly. Ownership builds equity that supports future borrowing, and Briggeman said a purchase should be judged on net present value, counting both the income off the land and its appreciation.

"If I'm going to buy it, I'm buying it as a long-term asset," he said. "That could be some real equity that could be added into the farming operation."

But projected benefits can't substitute for covering annual debt payments and operating expenses. Younger farmers with limited assets and big borrowing needs face real pressure buying high-priced land in a downturn, while stronger balance sheets handle the same deal more easily. Budgets should also include property taxes, maintenance and insurance, plus a hard look at mineral rights, water rights, easements, physical condition and any use restrictions.

Stress-test the numbers

Briggeman's sharpest warning is about optimistic spreadsheets. Projections that look great under average conditions can fail in a poor production year, and fixed cash rents fall due regardless of the crop.

"You need to stress it. I just think we need to do our due diligence in considering that worst-case scenario and running different numbers," he said. "You can put together numbers and pictures that will look great and kind of convincing, but you have to step back and say, 'Well, what's reality? Like, how low or how bad can things get before this would really stress my operation?'"

Debt capacity and cash reserves decide the answer, and the right call depends on where a producer sits in the business life cycle. In tough years, owned land can supply borrowing capacity when farmers need to term out losses, but only if the operation can service the debt.

"I think owning land is a sense of pride, and it's a way to really grow your operation," Briggeman said. "But at the end of the day, you got to make a cash flow."

For producers weighing acreage this winter, that's the number to run first, and the worst-case version second.