How long can this land price still be financed?

Financing land is a tricky issue in agriculture. Because the land is becoming increasingly scarce, prices have risen sharply. As a result, more and more debt is needed for business succession or expansion. But, how long can this land price still be financed?

The average acreage per farm has increased in recent years from 20,3 hectares in 2000 to 32,6 hectares in 2017. The price also increased during that period, representing an increasing share of the total assets of has a company. The value of land (relative to total property) has increased on average from 35,8% in 2014 to 55,2% in 2017.

The above also means that the value of the land is becoming increasingly important for the agricultural entrepreneur. If the price of land shows a change, this has a direct effect on the owner's equity. This is striking, because the price of land has less and less to do with the yielding value of the land.

Land value becomes more important
De land price has increased considerably since 1994, while the yielding capacity has remained more or less the same. The fact that interest rates are currently low seems to be related to the rising land price rather than the yielding capital. Yet it entails a great risk: many consider land a good investment, because the price of land has been rising for a long time. Interest rates are expected to rise in the short term.

In short: where the value of the land starts to play a greater role for the entrepreneur, the investment more and more difficult† In addition, the rising land value is an increasing problem for financing; certainly in combination with the stricter requirements for banks. As a result, the banks are less willing to provide long-term loans.

Research into financeability
Boerenbusiness therefore, together with DCA-Markets, conducted a study into the financeability in the agricultural sector. Nearly 1.800 agricultural entrepreneurs took part in this survey. "The large number of respondents was completely unexpected. The fact that the subject is so alive confirms the relevance of the research," says Luc Plomp, student at Wageningen University (WUR). 

The research shows, among other things, that farmers find it more difficult to finance the succession of the farm than an acreage expansion. More than half of the respondents (52%) have experienced resistance to financing their business succession. This while 38% had resistance to the financing of an area expansion.

This is not surprising, because business succession usually involves more factors and higher amounts. Nevertheless, the outcome that great resistance is experienced in financing business succession is worrisome; certainly when looking at the large group of successors and continuity of the sector. It also appears that the entity of the company has an influence on the resistance: a sole proprietorship experiences more resistance than, for example, a partnership.

Confidence in the future
Nevertheless, a large part of the respondents indicate that they have confidence in future financing. About 45% expect to experience (very) little resistance with financing in the future. The other side of the coin, however, is that 33% indicate that they expect resistance when it comes to financing, among other things, business succession or acreage expansion. 

It is striking that the farmers with a lot of property rights expect that they will be able to expand with property land in the future. On the other hand, the tenants see lease as the most realistic option for expanding. This shows a clear difference in mentality between the tenant farmers and the farmers who own a lot. 

Return leading in financing
In addition, the research shows that the expected return is often the most important problem in getting financing. About 33% of the respondents indicated that the expected return was a bottleneck. At the same time, the farmers have the idea that if they have sufficient equity capital, they can invest well in land. This is because its value continues to rise.

However, the lender's view is different. As an example we take a company of 20 hectares where the land has been almost completely repaid. If that farmer applies for €100.000 financing for a 4-hectare plot, and pays the majority himself, then the farmer's mindset is that there is sufficient equity. However, the financier calculates differently. He wonders whether the return of the company will be increased by the purchase of those 4 hectares. And the answer to that is ultimately leading.

This is the first article in a series in which the results of the research of Boerenbusiness and DCA Markets. The topics that will be discussed include: the feasibility of growing in owned land, the expectation of the land price and investing in land. 

The results of the survey are also presented in a fact sheet. This can be downloaded here. Boerenbusiness Thank you to the agricultural entrepreneurs who completed the survey.

Anne-Jan Doorn

Anne Jan Doorn is an arable expert at Boerenbusiness. He writes about the various arable farming markets and also focuses on the land and energy market.

aj.doorn@boerenbusiness. Nl

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