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EC Kansas | It is an academic question, but relevant if one is considering alternative investments that will meet yield objectives if not satisfied with current farming returns. Or as the OP wants to know the risk/benefit of additional debt.
To answer the OP, I am in my 60s. My land is owned free and clear. I started buying land in the mid 80s and bought my last farm two years ago. No equipment, all custom farmed. This year excellent wheat and corn yields and fair beans. All 2015 crops sold averaging 7.9 beans, corn 3.7, wheat 5.5.
For 2015, my net taxable cash basis Schedule F income will yield:
13.5% ROI
3.8% ROE
These numbers include it all, hide, hair feathers and guts as the OP wants it. Working capital equaling my total farming expenses and land cost for ROI and working capital and current land value for ROE. No debt. I do have equipment, fuel, labor costs as those items are in the custom rates I pay. FArming Cost or equity is reflected in my working capital number and land is either cost for ROI or current Market value for ROE.
Returns are at a level where it may make sense to lease rather than farm, but, I will continue to have the ground custom farmed as rents are likely to go down anyway. Crop share or cash rent would take the farming risk out and probably result in better overall returns as the risk of "farming" losses would be eliminated for the most part.
In current times, high ROEs are not there if you own a lot of land with little or no debt. Too much debt and you will be negative real fast.
If pigs could fly and our prices were like they were 2-4 years ago and I got 12 for beans, 5 for corn and 6.5 or 7 for wheat, my ROE would have been over 10-15% this year. Those years my yields were not as good so return %s were about the same as this year with low prices and good yields.
You can add debt to any scenario and do sensitivity analysis all day long, but the Universe is a great equalizer.
So, yes, the return exercises are a personal goal or objective and if you are not meeting them, you have the choice of investing in stocks, bonds, gold, Bitcoins, apartments, or an alternative that makes you happy.
In my experience, over the last 40 years, farmland has been a most excellent investment, farming not always, but the land gets its rent every year, as long as the farmer pays the cash or a crop is grown, the share is there and a return on the land is positive. The farming side may be negative as land cost comes out of that equation, as may be the case in current times, debt or not.
I dont' know what I said up there, but it was interesting to see my ROI and ROE for this year.
Thanks for asking OP.
Edited by trac8100 11/27/2015 19:26
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Return on equity as a farming operation matures
