Grade A farmland at a 2.9 percent yield against tired ground at 3.6, which holds up better in a downturn

Question

This is a useful comparison to work through carefully, because both sides have a real argument. Take two parcels in the same region, both about 80 acres. The first is what most would call Grade A: high soil productivity rating, tile replaced within the last decade, an operator who has farmed it for eleven years with yield records available for review. Asking works out to about $10,300 an acre, current cash rent $300, so a 2.9 percent going-in income return. The second is honest but tired: lower productivity rating, two low corners that hold water in a wet spring, tile of unknown age, an operator on a year to year handshake. Asking is $6,200 an acre with rent at $225, so 3.6 percent going in, with maybe 4 acres of scrub that could return to production and a fence line needing replacement. The case for the good ground is that markets tend to reward proven quality when buyers get selective, and that protection is worth paying for even at a yield barely ahead of a savings account. The case for the tired ground is that 70 extra basis points on 80 acres is real money, and improvements like tile and drainage are knowable work rather than speculation, buying a discount and earning the difference through effort. The harder question is which one behaves better across a bad five years, whether quality genuinely protects on the downside or whether both move together and the premium just buys comfort. Worth hearing from anyone who has held both types through a down cycle.

sonia_alvarez · Answer

One thing that will show up whichever way you go. Lenders who do ag land look hard at soil productivity ratings when they size a loan, and the tired parcel can appraise lower per acre than the contract even at $6,200 if the comps in that county are thin. That changes cash in, not just yield. If any of this is financed, get the lender's view on both parcels before signing a contract, and get their terms in writing since ag lending terms move around.

jordan_ellis2 · Answer

What actually makes a parcel Grade A? Is it purely the soil rating, or does the tile and the operator count toward it? Quill's two parcels differ on all of those at once, which makes the comparison hard to hold in my head.

dmitri_248 · Answer

Pike, in practice people mean soil first and everything else second. Quill, the handshake lease on the second parcel is the thing to fix in the purchase agreement rather than after closing. A year to year verbal arrangement can mean no enforceable rent for the coming season, and in many states farm lease termination requires written notice by a specific date or the tenancy rolls over. That date, and how it applies to a buyer stepping into the seller's position, differs by state, so a local attorney should confirm the deadline before anything is signed. The price gap between the two parcels is partly the price of that uncertainty.

raj_mehta14 · Answer

One angle nobody has raised. If the tired parcel is harder to finance, a seller carry becomes more likely there, and farm sellers carry paper more often than people assume. Ask the second seller directly whether he would carry and on what terms, because that changes what the 3.6 percent is really worth.

aaron_fitz10 · Answer

It happens, vellum, particularly with retiring owners who would rather spread the gain than take it all in one year. Tax treatment on installment sales is genuinely a question for a CPA though. Quill, the deciding question is whether you want a project. Parcel two is a small operating business for a few years. Parcel one is a bond with dirt attached. The real difference between them is the life each one demands, far more than the yield.

marcus_hale41 · Answer

Before comparing yields I'd want the same information set on both, and right now you don't have it. Pull the soil survey and the productivity index field by field on parcel two, not as an average. A parcel can carry a mediocre average with 60 good acres and 20 bad ones, which is a completely different asset from 80 uniformly mediocre acres.

Then price the tile honestly. Systematic tile installation runs real money per acre and varies a lot by spacing and terrain, and it is the kind of quote that comes back higher than the number you carried in your head. If the fix costs $1,200 an acre, your $6,200 parcel is a $7,400 parcel and the yield gap closes to almost nothing before you've collected a single rent check.

On the downside question, what I saw in the last cycle is that thin ground sells at a wider discount when buyers get selective, and it takes longer to sell at all. Grade A tends to trade. That's a liquidity difference more than a value difference, and it only bites you if you have to exit at a bad time.

aliyah_b · Answer

Don't forget the closing side. Survey, title, and any transfer tax vary by state and can be a couple thousand either way, and on the tired parcel you may want an environmental look if it's ever had fuel storage or a dump corner. That's a first deal cost people forget until it's on the settlement statement.

mikeoconnell7 · Answer

If you go with parcel two you will probably want a farm manager for the first couple of years to rebid that lease properly. Typical fees run around 6 to 8 percent of gross rent, sometimes quoted as a flat per acre figure. On $18,000 of rent that is a bit over $1,200 a year, which eats a chunk of your 70 basis point advantage. Worth pricing into the comparison rather than treating it as free.

samantha_ruiz · Answer

Buy the good ground. I've spent three years finding the ceiling on cheap assets in another sector and the pattern is the same every time. The discount is priced correctly. The market knows about the wet corners.

nataliehsu · Answer

Keystone, does that hold when the discount is for something fixable? Genuinely asking, because everyone says the market prices it right and yet people do make money on repairs.

Grade A farmland at a 2.9 percent yield against tired ground at 3.6, which holds up better in a downturn

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