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Farmland Leasing Arrangements. Craig Chase, Field Specialist Farm & Ag Business Management. Session Topics . Land Values Cash Rental Rates Leasing Practices Crop-Share Leases Calculating a Cash Rent Lease Flexible Cash Leases. Background.

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farmland leasing arrangements
Farmland Leasing Arrangements

Craig Chase, Field Specialist

Farm & Ag Business Management

session topics
Session Topics
  • Land Values
  • Cash Rental Rates
  • Leasing Practices
  • Crop-Share Leases
  • Calculating a Cash Rent Lease
  • Flexible Cash Leases
background
Background
  • Land values have been increasing for the past several years. Record levels for each of the past 4 years.
  • Increases fueled primarily by poor overall economy, low interest rates and attractiveness of land investment. Investors were more important in the market the past several years.
background4
Background
  • Bioeconomy has created a boom in the land market since last fall.
  • Land value increases are continuing at a rapid rate.
  • Existing farmers are becoming more active participants.
  • Land has increased 73% since 2000.
iowa farmland value surveys
Iowa Farmland Value Surveys
  • Iowa State University Extension
    • conducted annually around November 1st
    • mailed survey sent to 1,100 licensed real estate brokers
    • usually 500-600 responses
    • released in mid-December
  • Federal Reserve Bank of Chicago
    • quarterly survey of ag lenders by state
    • http://www.chicagofed.org/economic_research_and_data/ag_letter.cfm
  • Realtors Land Institute
    • semi-annual survey (March and September)
    • compares land classification by corn production
    • includes pasture and timber land
    • http://www.centralstatesland.com/csmlsdisplay.asp?id=ed01
recent land value estimates
Recent Land Value Estimates
  • Chicago Fed reported a 7% increase in the 1st quarter and a 16% increase April to April for the 7th District.
  • Iowa Chapter of Realtors Land Institute reported a 13.6% increase from September to March.
  • ISU Soil Management Conference participants estimated a 20% increase from Nov. to Nov. 6% increase from Nov. 07 to Nov. 08.
factors to watch
Factors to Watch
  • Overall performance of the economy, especially interest rates.
  • Recreational demand.
  • Performance of the housing market.
  • Aging farmland owners and what the second generation will do with the land.
factors to watch17
Factors to Watch
  • The bioeconomy, especially corn based ethanol.
  • The government programs, new farm bill will be out this year; outcome for level and type of programs is unknown; more of the same but less of it; major cuts? Regional differences could be a major factor; Public sentiment.
slide24
Crop Share 50-50 Lease

Landlord

Tenant

Labor

½ inputs

Machinery

Management

Land

½ inputs

½ income

½ income

slide25
Crop Share 50-50 Lease

Landlord

Tenant

Land $180

½ inputs $ 90

Labor $ 28

½ inputs $ 90

Machinery $ 57

Management $ 95

½ income $270

½ income $270

quick overview
Quick Overview
  • From the Owner’s perspective:
    • Which lease is least volatile from year to year?
  • From the Tenant’s perspective:
    • Which lease is most volatile from year to year?
slide30
Supporting Information

Location: Black Hawk County

Tillable Acres: 400 Acres

Corn Yield: 180 bu/Acre

Soybean Yield: 50 bu/A

Corn Suitability Rating: 80 CSR

slide31
Calculating Cash Rent Values
  • Cash Rent Market Approach
    • ISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2007 Survey (released in May)
  • Three Methods for Determining Cash Rent Values
    • Typical Cash Rent
    • Average Rent for Production
    • Average Rent for Corn Suitability Rating (CSR)
slide33
Calculating Cash Rent
  • Typical Cash Rent
    • Select the Area of the State/County
      • Area 8 County Black Hawk
      • Determine Overall average $ 185
      • High Quality Third = $ 208
      • Middle Quality Third = $ 181
      • Low Quality Third = $ 159
slide34
Calculating Cash Rent
  • 2 a. Average Rents Per Unit – Corn Yield
    • Select the Area of the State/County – Black Hawk
    • Determine Average Rent for Corn
      • Farm’s Average Corn Yield (bu/A) 180
      • Times rent per bushel of Corn yield $ 1.14
      • Equals the Average Rent for Corn Acre $ 205
slide35
Calculating Cash Rent
  • 2 b. Average Rents Per Unit – Soybean Yield
    • Select the Area of the State/County – Black Hawk
    • Determine Average Rent for Soybeans
      • Farm’s Average Soybean Yield (bu/A) 50
      • Times rent per bushel of Soybean yield $3.87
      • Equals the Average Rent for Soybean Acres $ 194
slide36
Calculating Cash Rent
  • Average Rents Per Unit – Corn & Soybeans
    • Add the Average Rent for Both – Black Hawk
      • Corn Average Rent $ 205
      • Soybean Average Rent $ 194
      • Average Rent Corn & Soybeans $ 200
slide37
Using Corn Suitability Rating (CSR)
  • Average Rents Per CSR Index Point
    • Select the Area of the State/County – Black Hawk
    • Determine the Average Cash Rent using CSR
      • Farm’s Average Corn Suitability Rating 80
      • Times rent per CSR index point $2.31
      • Equals the Average Rent for all Row Crop Acres $ 185

Source: ISU Extension Publication FM- 1851

leasing opportunity
Leasing Opportunity

Soil Type: Acres: Percent: CSR

---------- -------- -------- -----

T370B 61.47 23.2% 85

248 17.72 6.7% 60

T368 16.70 6.3% 90

212 11.71 4.4% 91

T369 87.78 33.1% 85

133 9.69 3.7% 80

220 60.11 22.7% 85

---------- -------- -------- -----

Totals 265.19 100.0% 83.73

Iowa Corn Suitability Rating

based yield estimation:

179 bushels per acre

slide40
Overall Average
  • Average all 3 Methods – Black Hawk
    • Method 1: Typical Cash Rent $ 185
    • Method 2: Average Rents per Unit $ 200
    • Method 3: Average Rents per CSR Index Point $ 185
      • Total all Methods and divide by 3 $190 /A
      • $190 /A X 400 Tillable Acres = $76,000

Source: ISU Extension Publication FM- 1851

slide41
Cash Lease Calculations

4. Gross Income Method

5. Tenant Residual Method

6. Crop Share Method

7. Return on Investment Method

  • Assumptions:400 crop acres, 180 bushel corn yield, 50 bushel Soybean yield,
  • Corn Market Price $3.00 / bu, Soybean Market Price $7.50 / bu,
  • Direct Government Payments average $22.00 / acre
slide42
Share of Gross Income

CORN: (180 bu X $3.00) + $22 = $562.00

SOYBEANS: (50 bu X $7.50) + $22 = $397.00

Iowa cash rents typically are equal to about 30 to 40 percent of the gross

income from producing corn, and 35 to 45 percent of the gross income

from producing soybeans.

Cash Rental Rate

4a. CORN: $562.00/ac X 35% = $ 197

4b. SOYBEANS: $397.00/ac x 40% = $ 159

4. Average $ 178

slide43
Tenant Residual Method

5a. CORN: $562 – $339 = $223

5b. SOYBEAN: $397 - $187 = $210

5. Average: $217

Costs: FM-1712 less land

slide44
Crop Share Method 50-50 Share

Income:

Corn: 50 % x 562 = $281.00

Soybeans: 50 % x $397 = $198.50

Expense:

Corn: 50 % x $243.50 = $124.75

Soybeans: 50 % x $113.00 = $56.50

Equivalent Rent:

6a. Corn: $281.00 - $124.75 = $156.25

6b. Soybean: $198.50 - $56.50 = $142.00

6. Average: $149

  • The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime,
  • pesticides, crop insurance, interest and miscellaneous, and drying.
slide45
Return on Investment Method

Iowa farm estimated to have a market value of $3,700 per acre.

7. Expected Rent: (5%) X $3,700 / acre = $185 / acre

slide46
Calculation Method

Corn Soybeans

1. Cash Rent Survey

2. Per Bushel Yield

3. Per CSR Point

4. Gross Income

5. Tenant Residual

6. Crop Share

7. Return on Investment

Average

$185 $185

$205 $194

$185 $185

$197 $159

$223 $210

$156 $142

$185 $185

$209 $180

All Average: $195

2006 Average: $157

24% increase

Black Hawk

future consideration
Future Consideration
  • What are prices (income) going to be?
    • Ethanol impact – how long?
    • Shifts in what is grown – Global impact?
  • What are inputs going to cost?
    • Higher oil, higher fertilizer costs.
    • Higher demand for seed, technology cost.
what should the cash rent be
What Should the Cash Rent Be?

November Soybeans

Tenant’s Residual

Crop Share

Share of Gross

December Corn

slide57
71 Potential Iowa Plants

11 Just across IA Borders

Capacity: 142% of 2006 Crop

Iowa Corn Processing Plants, Current & Planned, 5/30/07

flexible cash leases
Flexible Cash Leases

Desire:

Stable and predictable rents.

Current Reality:

Prices and yields are very unpredictable.

Potential Solution:

Flexible lease contract

advantages disadvantages
Price and production risk shared as well as profit opportunities

Actual rent adjusts as production or price change

Owner does not have to be involved in decision making about inputs or marketing

Owner and producer share in risks

Not as well understood as traditional cash lease or crop share

More difficult to calculate

Owner benefits from tenant’s management skills

Tenant loses windfall profit potential from high prices

Advantages Disadvantages
types of flexible cash leases
Types of Flexible Cash Leases
  • Rent varies with both price and yield
    • Matches tenant’s ability to pay
  • Rent varies with yield only
    • Could have high yields, low prices
  • Rent varies with price, only
    • Could have low yields, high prices
flexible cash lease is a share lease
Flexible Cash Lease is a Share Lease
  • Farm Service Agency says that if the actual rent depends on the farm yield, direct and counter cyclical payments must be shared with the landowner.
  • Considered to be a “share” lease
  • Does not apply to LDPs or marketing loan gains.
flexible cash lease is a cash lease
Flexible Cash Lease is a Cash Lease
  • If the final rent does not depend on the farm yield, a flexible rent is still considered to be a cash rent.
  • Example: base rent on county average yield and actual price at harvest.
  • County yields are not published until March each year.
base plus bonus
Base plus Bonus
  • Paying a “flex bonus” when revenue is above expectations does not affect the split of payments if it is not based on the actual farm yield.
  • Provide a copy of your agreement to the FSA county office.
slide74
Other Resources
  • Online Courses – Ag Management e-School
    • http://www.extension.iastate.edu/ames
  • Workshops, meetings, conferences
    • http://dbs.extension.iastate.edu/calendar/
  • Publications – rental survey, land value survey, etc.
    • http://www.extension.iastate.edu/pubs/
  • Articles and spreadsheets
    • http://www.extension.iastate.edu/agdm/
land leasing confidence
Farm Lease ArrangementsLand Leasing Confidence
  • Introduction to Farm Leases
  • Cash Rent Leases
  • Crop Share Leases
  • Custom Farming
  • Renting Buildings
  • Renting Hay and Pasture Land
  • Legal and Tax Considerations
  • Conservation and Environmental Considerations
  • USDA Agencies and Programs
  • Owner and Operator Relations

A.M.E.S.

Agricultural Management e-school

An ISU Extension Outreach Institute

questions
Questions…..

Any questions or comments?

Thank You for This Opportunity!

Craig A. Chase

Farm Management Field Specialist

720 7th Avenue SW

Tripoli, IA 50676

(319) 882-4275

[email protected]

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