Farmland values and leasing key questions chapter 20 l.jpg
This presentation is the property of its rightful owner.
Sponsored Links
1 / 36

Farmland Values and Leasing Key Questions Chapter 20 PowerPoint PPT Presentation


  • 80 Views
  • Uploaded on
  • Presentation posted in: General

Farmland Values and Leasing Key Questions Chapter 20. What determines the value of farmland? What are the advantages and disadvantages of owning vs. leasing? What are the common types of farm leases? How can a fair cash rent be determined?. Land Value Trends in Iowa. 1973-1981

Download Presentation

Farmland Values and Leasing Key Questions Chapter 20

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


Farmland values and leasing key questions chapter 20 l.jpg

Farmland Values and LeasingKey QuestionsChapter 20

  • What determines the value of farmland?

  • What are the advantages and disadvantages of owning vs. leasing?

  • What are the common types of farm leases?

  • How can a fair cash rent be determined?


Land value trends in iowa l.jpg

Land Value Trends in Iowa

  • 1973-1981

    • Increased export demand

    • High grain prices

    • Low interest rates

    • High inflation rate


Slide4 l.jpg

  • 1982-1986

    • Higher interest rates

    • Lower inflation

    • Weather problems

    • Forced sales

  • Since 1986

    • Farm economic recovery

    • Government payments

    • Higher yields

    • Lower interest rates


Who buys iowa farmland l.jpg

Who Buys Iowa Farmland?


Farm for sale l.jpg

Farm for Sale

  • FOR SALE: 80 acres in Hamilton County, 75 acres tillable, Clarion-Webster soil type, CSR of 76 and 84. No buildings. Hard surfaced road. Contract available.


Key questions in analyzing a land purchase l.jpg

Key Questions in Analyzing a Land Purchase

  • Does it fit in with the operation?

    • Labor supply

    • Machinery

    • Livestock

    • Location

  • Is it worth the asking price?

    • Will the potential income support it?

    • How is it priced relative to the market?


Land valuation capitalization of earnings l.jpg

V = R / d

V = value of asset

R = expected annual earnings--$

d = discount rate

Discount Rate

Average cost of capital 6-7%

Minus expected inflation rate 2-3%

Equals discount rate 4%

Land Valuation:Capitalization of Earnings


Slide9 l.jpg

Net Returns to LandCornSoybeans Average

Yield16552

Price$2.40$6.00

Gross income$396$312$354

USDA direct payment 24

$378

Seed, fert, pest.160 100

Mach. Ownership 40 25

Mach. Operating 30 20

Drying 21 0

Labor 2523

Total nonland costs$276$168$222

Property taxes, etc. 24

Net return to land$132


Capitalized land value l.jpg

Capitalized Land Value

  • Land value = $132 / .04 = $3,300 per acre


Farmland values depend on l.jpg

Farmland values depend on:

  • Productivity (supply of crops)

  • Costs of production

  • Crop selling prices (demand)

  • Interest rates

  • Inflation

  • Alternative investments


Comparative sales l.jpg

Comparative Sales

  • Recent actual sales

  • Similar land

  • Same area


Comparative sales factors to compare l.jpg

Comparative SalesFactors to compare:

  • Productivity+

  • Location+ or -

  • Other uses/income + or -

  • Family sales-

  • Sales contract+

  • Size of tract+ or -


Value based on productivity l.jpg

Value Based on Productivity

CSR Rating

X$ per CSR point

=Estimated value

Example:

Comp. sales averaged $50 per CSR point

$50/ CSR point x 80 CSR = $4,000


Adjust for tillable l.jpg

Adjust for % Tillable

  • Example:

  • 75 acres tillable out of 80 = 93.75%

  • $3,000 x 93.75% = $3,750 per acre


Financial analysis of a land purchase l.jpg

Financial Analysis of a Land Purchase

  • Where can I obtain financing?

    • Equity (savings)

    • Credit

    • Installment contract

  • Will it cash flow?

    • On its own?

    • With help from other sources?


Cash flow analysis l.jpg

Sale price

Down payment (1/3)

Loan amount(2/3)

Amortization factor

(7%, 25 yr loan) (p.418)

Annual payment

Income available

Surplus/deficit

$3,600

-1,200

= $2,400

x

.0858

= $206

$120

(86)

Cash Flow Analysis


Characteristics of farmland l.jpg

Characteristics of Farmland

  • Does not depreciate or wear out

  • Supply is fixed

  • Each parcel is unique

  • Values depend on profits from agriculture, other uses

  • Ownership provides security, pride


Farmland leasing in iowa l.jpg

Land

Farmed by owner46%

Farmed by tenant54%

Types of Leases--acres

Cash69%

Crop Share30%

Other 1%

Farmland Leasing in Iowa


Own vs rent l.jpg

Ownership

Security

Inflation hedge

Pride

Build equity

Loan collateral

Rental

Flexibility

Lower cash cost

No investment

Larger scale

Own vs. Rent


Cash leases l.jpg

Cash Leases

  • Tenant pays a fixed rate

  • Tenant takes all the risk

  • Rent may be due in advance

  • Most are one-year agreements

  • More management freedom

  • Fewer records to keep


Estimating a fair rent l.jpg

Estimating a Fair Rent

Tenant’s Residual (max. to pay)

= gross income - nonland costs

gross income$378

nonland costs 222

residual$156

Machinery fixed costs? Labor?


Estimating a fair rent23 l.jpg

Estimating a Fair Rent

% of gross income

(typically 35 to 40 %)

C: ($396 + $24) x 35% = $147

SB: ($312 + $24) x 40% = $134


Cash rent based on yields l.jpg

Cash Rent Based on Yields

  • Corn: $.90 - $1.00 per bushel

  • Soybeans: $2.70 - $3.00 per bu.

  • Example:

    Corn: 165 bu. X $.90 = $148

    Soybeans: 52 bu. X $2.80 = $146


Flexible cash leases l.jpg

Flexible Cash Leases

  • Rent is paid in cash

  • Amount of rent depends on actual prices and/or yields

  • Tenant pays all crop expenses

  • Tenant and owner share risks

  • Must agree on how to calculate rent, and how to determine actual price and yield


Flexible rent example l.jpg

Flexible Rent Example

Rent = % of Gross Revenue

Typical: 30-40%

(165 bu. @ $2.40 + $24) x 35% = $158

(100 bu. @ $2.80 + $24) x 35% = $106

(200 bu. @ $2.50 + $24) x 35% = $183

-Usually include government payments.

-May set a minimum and maximum rent.


Crop share leases l.jpg

Crop Share Leases

  • Tenant and owner divide crop

    • 1/2 and 1/2 is typical

  • Tenant and owner share cost of crop inputs (seed, fertilizer, pesticides, drying, crop insurance)

  • Tenant supplies labor and machinery

  • Both price and production risk are shared

  • Less capital is required from tenant


Evaluating a share lease l.jpg

Evaluating a Share Lease

CornTotalTenantOwner

Seed,fert,pest$160$80$80

Machinery$ 70 70 0

Drying 21 15 6

Labor 25 25 0

Management 20 20 0

(5% of gross $396)

Land $140 0 140

Total $436$210$226

Share 100%48%52%


Developing a good lease l.jpg

Developing a Good Lease

  • Discuss details and put it in writing

  • Treat the land as if it were your own

  • Communicate frequently

  • Consider environmental effects

  • Go the extra mile

  • The tenant that will pay the most is not always the best


Custom farming l.jpg

Custom Farming

  • Operator supplies labor and machinery, only

  • May buy supplies, choose inputs, etc.

  • Receives a fixed payment, sometimes a bonus or % of crop

  • Owner takes all the risk


Livestock share lease l.jpg

Livestock Share Lease

  • Crop costs split same as crop-share lease

  • Owner provide buildings, pasture, stationary equipment

  • Tenant provides movable equipment, labor

  • Divide livestock, feed, operating costs

  • Divide income equally

  • Not very common now


Contract farming l.jpg

Contract Farming

  • Usually involves growing specialty crops

    • high oil corn, seed corn, organic grains, etc

  • May receive a fixed payment

  • May receive a guaranteed price

  • Must meet quality standards

  • Management requirements are stricter

  • May need separate storage

  • Need a guaranteed market


Contract finishing l.jpg

Contract Finishing

  • Operator provides buildings, labor, operating costs

  • Contractor provides animals, feed, health services, marketing

  • Operator receives a fixed payment per animal or space. May have a bonus.

  • Limited risk, limited returns


Custom feeding mostly cattle l.jpg

Custom Feeding(mostly cattle)

  • Operator supplies feedlot, labor, feed, and all operating expenses

  • Owner of cattle pays a yardage fee ($ per head per day) plus health costs, feed costs, transportation


  • Login