In 2003, Arizona ranked thirteenth among the 50 states in milk production and seventh in terms of annual production growth (28.9% over 2002).

This comes at a time when the U.S. Census Bureau ranks Arizona as the second fastest growing state in the country (behind Nevada), with 40 percent growth in population between 1990 and 2000.

Of course, a growing population requires new housing, new highways and new places to shop.

And who wins when dairy cows meet developers?

Usually, it’s the developers. Every day more farmland is plowed under to make way for homes and businesses in urban and suburban growth areas around Phoenix, Tucson and, increasingly, in Pinal County.

What does this mean to Arizona dairy farmers?

Basically, get going while the going is good, according to Neil Schneider, spokesperson for the Arizona Farm Bureau Federation.

“At some point, farmers must decide which is better financially,” Schneider said. “Do you try to stay farming in an urban area or do you rebuild in a more ag-friendly community? Economically, you just can’t continue to farm in an urban area.”

The fact is when a new subdivision intrudes upon the rural landscape, residents quickly discover that tractors and traffic don’t mix; neighbors complain about odors; and the application of farm chemicals becomes a problem.

Moving, when properly planned and timed, can be a wise decision for dairy farmers. With land values ranging from $60,000 to $100,000 per acre (and sometimes higher), selling farmland can be an attractive proposition. And for the dairy professional committed to the business, selling the land does not mean loss of the family farm. In fact, astute dairy farmers can survive – and even thrive – with a well managed move to a new location.

Two benchmarks

Before you make the move, Farm Credit experts suggest that you consider two important benchmarks. One relates to the cost (land plus building expenses) of your new site, and the other to the amount of debt you can safely incur.

Tom Schorr, FCSSW’s Appraisal Program Manager, says, “The price of the land and current construction costs help determine the economic feasibility of a move. Based on recent history, the point of diminishing returns is when the land you want to purchase reaches significantly more than $5,000 to $6,500 an acre. As land values increase beyond those amounts, the value contribution of dairy improvements may actually decrease. This creates a challenge for those dairy farmers who hesitated to purchase relocation sites as central Arizona’s irrigated farmland escalated in value.

Tom Schorr, FCSSW's Appraisal Program Manager, recommends a benchmark of below $5,000 to $6,500 an acre for a new site.

“In addition,” Schorr continued, “construction costs, including steel and concrete prices, have doubled and tripled in the past year. The added costs may not translate into added value, especially if prices stabilize or even decrease in the future.

“So my best advice for dairy farmers is to review relocation land and construction costs carefully when considering the sale price of an existing facility. And to coordinate your entire relocation project with your loan officer to determine its economic feasibility and the continued success of your business.”

Steven Reiley, Vice President and Branch Manager at Farm Credit’s Tempe office, points out that your Farm Credit loan officer can help you address the second issue: debt management.

“Before you take advantage of high land values to rebuild in a more rural area,” Reiley says, “consider that building costs may be a third higher today than they were just two years ago. While it may be hard to resist $100,000 an acre offered by developers, your new facility may still increase your debt levels.”

FCSSW has created a lending guideline that serves as a marker for the likely success or failure of a move. “When we consider a lending limit,” Reiley says, “we generally consider a total debt limit of $2,000 per cow as the benchmark. This equates to a lot of equity in your operation, and we believe this is a financially safe way to run a business.”

Your loan officer can help

Reiley points out that your FCSSW loan officer can help you evaluate your own situation. This usually begins with an interview that addresses a variety of issues, including:

• the land that you are planning to purchase (water sources and quality; acreage; zoning issues)
• projected herd size (current numbers; number to be purchased)
• equipment needs (additional machinery, vehicles, updated technology)

Reiley says, “Your Farm Credit Services Southwest loan officer can help you crunch the numbers. He or she will enter your data to spreadsheets and models and provide a variety of projections for you to consider, from conservative to aggressive.”

Reiley added, “We can also walk you through municipal bond funding issues, and provide the required letter of credit. In addition, our appraisal staff can review your plans and specifications of your proposed facility with you.” Tom Schorr, FCSSW’s Appraisal Program Manager, recommends a benchmark of below $5,000 to $6,500 an acre for a new site.

Timing is critical

One of the dairy farmer’s biggest challenges relates to the timing of a proposed move. FCSSW appraisal specialist Tom Schorr says, “Everyone wants to take advantage of high land values in the Phoenix Valley and reinvest their money via the 1031 tax-free exchange vehicle that allows them to trade for like-value land without paying capital gains tax.”

This means that dairy farmers must take a close look at the relative value of their current property compared with the value of the land they wish to purchase. According to Schorr, “Just two years ago, a dairy farmer could have purchased 320 acres to 640 acres in Pinal County for $2,500 to $4,000, but that same land has doubled or tripled in price because of competition from investors and other dairy farmers.”

Thus, a farmer must look at future development trends when scouting for a new site. It’s important to relocate to an area where you can expect to operate efficiently for the 20- to 25-year economic life of a new facility in order to reap the full benefit of your investment.

Steven Reiley, Vice President and Branch Manager of Farm Credit’s Tempe office, points out that FCSSW considers a total debt limit of $2,000 per cow as a marker for the likely success or failure of a move.

Importance of planning

What it all comes down to is careful planning. Dr. Matt VanBaale, Extension Dairy Specialist and an Assistant Professor at the University of Arizona, offers this: “Arizona dairy farmers are progressive business people who recognize that urban development will continue. Each producer is an individual who makes decisions his own way. But because dairy farms are family businesses,

farmers include family issues in their decisions, such as where their children are in school. Farmers with high-school aged kids, for example, may add waiting a year for graduation into their plans.” There is no doubt that dairy is a growing business in Arizona. But to maintain the momentum, dairy farmers who find themselves on the cusp of urban growth must make commonsense business decisions to ensure their continued success.

Click here for "The Relocation Dilemma: Two Case Studies and
                 "How Farm Credit Can Help:"

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