A CLIENT recently made an interesting statement about a piece of land up for sale - "Why would I purchase grazing land at top dollar that wouldn't fatten a rabbit?"
I thought that was a funny line, but the underlying question is a good one. Someone thought it was a worthwhile investment though, as it sold within a week.
There are lots of reasons why agribusinesses expand their holdings. Land is a scarce commodity, particularly in tightly-held areas. Other reasons include gaining economies of scale and allowing more family members to farm.
It does pay to have your ducks in a row before any purchasing decision is made, particularly in the present environment of high demand for agricultural land. The expectation in the marketplace is that vendors anticipate a cash contract to be signed - that is, no subject to finance clause. It is imperative that finance be organised, or at least well under way.
As an agribusiness you need to know your "why". Namely, what is the real reason you want to purchase land, or any other big-ticket item for that matter? Hopefully, not too many people make these big decisions on a whim, but I suspect there are a few that still do.
Every agribusiness should have a strategic plan that clearly outlines the path the business wants to take in the next at least 10 to 15 years. Inside this plan, there should also be a capital management plan. This can encompass both machinery and land purchasing decisions.
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Of course, decisions about purchasing plant are much easier, as they are always making machines, and it doesn't really matter which one you get off the assembly line, as they are all the same.
But, land is completely different, as agricultural land traditionally is a long-term asset and normally multi-generational. This is why there is usually great excitement when good land comes on the market. Another side effect of these types of events is the inevitable ramping up of the rumour mill.
What is fact or fiction can get lost in the general discussion about land being on the market. I tell people not to engage or worry about what the grapevine is saying. Spend your time more studiously on getting your information together to enable a quick response from the bank in regard to your finance request.
How much to pay for the land is another constant issue. It's a bit like saying, 'how long is a piece of string?' You need to know the reasons why you want to purchase the land, its productive capacity, and the return on investment in the long-term. If these things stack up, then of course, do everything you can to secure the property.
If you are able to talk to the vendor, this might be a good idea, as you never know what is driving them, and you may be able to tailor a deal to suit both sides. Some left-field thinking never goes astray.
In the end, if you have a thriving business, these decisions will be much easier, as you're already likely to know your why, and how it fits into the long-term plan.
- Details: bagshawagriconsulting.com.au
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