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WE BOUGHT A FARM earlier this year. We already have a greenhouse business, where we grow flowers, as well as several small tracts of land. The purchase was part of our farming plan, which involves expanding our crop business as opportunities arise.
But buying a farm is also part of our estate plan—and our fishing hopes. We now have two ponds with fish. True, they’re very small fish, as far as we can tell from three afternoons of fishing, but we have hopes.
Farm real estate is an interesting investment. From a cash flow basis, farms don’t have much to offer. If we’re lucky, our new farm will have an annual cash return, after all expenses, of around 2.5% on our initial investment. That’s worse than a certificate of deposit at the local bank, and our investment certainly doesn’t come with a government guarantee. That said, the government does have an interest in farming, and various subsidy programs tend to smooth the cyclical nature of farming.
According to the Department of Agriculture, farmland values in Missouri have appreciated at an average 6% a year since 1950. A survey by the Kansas City Federal Reserve found that farmland values in Western Missouri, where I live and farm, went up 17% in 2022. That’s unsustainable, and farmers as old as I am can remember the 1980s, when farmland prices dropped 25% over the course of nearly a decade.
Will our farm make up in capital appreciation what it lacks in annual cash return? Perhaps. On the other hand, we could be at a cyclical top in farm values. But it doesn’t really matter. We won’t be selling in our lifetimes and, if our commitment and values pass to the next generation, we won’t be selling in the future.
It’s a good thing we don’t plan on selling. Farms aren’t liquid. We couldn’t sell this place quickly if we had an urgent need for cash. In fact, completing the transaction to purchase the farm was a nightmare. It was supposed to close on Jan. 30, and we finally received possession on April 14, and only then because I had negotiated an April 15 financial penalty for the sellers, who were delinquent in supplying us with a clear title. Both the nature of farm real estate and our emotional commitment to this farm guarantees that it’s an investment for the long term.
We paid for the farm with cash, after a several year period of moving funds out of my tax-protected retirement funds. I parked the money in a Roth IRA while looking for a farm to purchase. This increased our tax bill over the past few years, but it’ll save my family taxes when my wife and I shuffle off this mortal coil.
Is that a good exchange? Maybe not based solely on a financial accounting. But farmland has an emotional value to my wife and me and, to be totally honest, we’re also attempting to encourage our heirs to continue our family’s long-term commitment to farming and farm real estate.
Upon our death, the farm will be run by our children. The land will receive a step-up in cost basis, should it increase in value during the time we own it. That will protect any gain in value over the remainder of our lives from capital gains tax. We also don’t have to worry about the estate tax under current law, and we hope our planning will protect us if there’s a lower federal estate-tax exemption in the future. The value of the farmland we own at death should never be taxed again, unless our heirs choose to sell. Even then, capital gains taxes would only be owed on any gain in value after our deaths.
On the other hand, most of the rest of the value of our estate will be in IRAs. Upon our passing, our heirs will have to pay taxes on the remaining value over a 10-year period at personal income-tax rates. That may force them to sell assets from our IRAs, even if the market is in the doldrums. I can’t forecast future tax rates, but I would wager that tax rates will be higher than they are now.
I have neither the skill nor the patience to model the expected future value of the taxes we’ve paid on my IRA withdrawals over the past few years. I also can’t predict the future trend of farmland values, but I’m comfortable with the way we’ve handled the transaction. The alternative—a debt-financed purchase while keeping my cash in an IRA—would probably have made more financial sense, but I’m reluctant to take on a mortgage that’ll last longer than I will.
It was a hot and dry June, and my soybean crop on the new farm has been suffering. It may be next year before I see any cash return. Still, the bass are growing, and the grandkids have already caught a few. What’s that worth? I don’t know, but they’ll remember those bass ponds long after they’ve forgotten any money Grandpa made from a smart investment in the stock market.
Blake Hurst farms and grows flowers with his family in northwest Missouri. He and his wife Julie have three children. Their oldest daughter and both sons-in-law are involved in the family business, growing corn and soybeans, and shipping flowers to four states. Their middle daughter is the chief operating officer for a small hospital. Their youngest, a son, is a lawyer for the Department of Justice. Blake and Julie have six grandchildren. Blake is the former president of the Missouri Farm Bureau and a freelance writer. His previous articles were I’ll Take It From Here and When to Quit.
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blake, just came across this post. i am retiring from colo to tn next spring.
i am bringing along an hon. dicharged/disabled vet and his family. i want to buy land and raise lavender, sunflowers, etc. i am interested in using his ”position” to get a low interest ag/va loan. are there any resources online you can recommend to navigate this process? t.u. alex
Blake I share your sentiments. Money is just an instrument to achieve what you value in life. I grew up farming and while I choose to seek a career in IT, I have always had fond memories of farming. I will say it is not for the faint at heart. We rarely had a positive cash flow and yes government subsidies helped. My Dad worked other jobs in the winter to pay the bills, he became a highly skilled trim carpenter; his love was always the farm. My mom and the children worked other jobs too. My great grandparents made the land run to stake their claim on a 1/4 section of land that became a 1/2 section later in my great granddads days & we had a 27 acre pond where we sold fishing permits as a source of income. My sister now has the farm. Farming teaches immeasurable values & work ethic with the opportunity to create business skills & great memories.
Blake, a number of years ago I treated an economist who, decades before, had done research on feed conversion ratios for fish versus farm livestock. Two or three years ago, a fish biologist told me they still use his work. You probably know that grow fast with a little bit of feed. A little investment can return a lot of fun!
Blake, I enjoyed this article as well as your previous ones. Your farming business and investments are a whole different kettle of fish for most of us HD readers, and your well written pieces shed considerable light.
“I’m reluctant to take on a mortgage that’ll last longer than I will.”
I totally agree and that’s why my wife and I are paying cash (inheritance money) for our new house being built.
Blake, thanks for an interesting story. Your stories represent one of my favorite parts of HD – the opportunity to read and learn about different lives and financial journeys, especially from talented writers. I’ve never had the urge to do traditional farming, but a boutique vineyard and winery in a beautiful setting hold great appeal. I’d probably drink most of the profits!
You’re right about the bass ponds. I have very fond memories of my grandfather’s catfish pond.
I remember years ago reading about a couple who had bought an interest in an organic farm. Among their expected returns was free vegetables in season. I’ve always thought this was a nice benefit. And I’ve always had a part of me that wants to own land. Preferably with a fish pond. But have never explored it seriously.