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  1. Surviving the Risk: A look at lease agreements, budgets, marketing and more! University of Maryland Extension Jenny Rhodes Shannon Dill John Hall Extension Educators, Agriculture & Natural Resources

  2. Jenny Rhodes Shannon Dill John Hall Extension Educators, Agriculture & Natural Resources University of Maryland Extension

  3. Crop Budgeting • Communication • Leasing • Marketing University of Maryland Extension Jenny Rhodes Shannon Dill John Hall Extension Educators, Agriculture & Natural Resources

  4. Crop budgeting

  5. What are enterprise budgets? • Enterprise budgets – • An organized listing of your estimated gross income and costs which can be used to determine the expected net income for a particular enterprise • Budget on a per unit basis – 1 acre or Per Bushel • Sections include • Income, Costs, Profit

  6. 5 Parts of a Budget • Investment • Gross Income • Variable Costs • Fixed Costs • Net Income

  7. Budget Suggestions • Should be prepared with specific objectives • Markets, establishment, soil types, management • Receipts and costs are often difficult to estimate • Numerous, variable • Be sure to have a column of your estimates • Should contain receipts for every product and by product – processing, stalks etc • Prices used should reflect market values and productivity of enterprise resources • Ie land, labor, equipment

  8. Variable costs: Cost items that vary with production volume.

  9. Cost Components • Fixed Costs • Fixed costs are expenses that do not vary with the level of output. • Building costs • Machinery costs • Taxes • Insurance • Mortgage

  10. DIRTI • Deprecation • Interest • Repairs/Maintenance • Taxes • Interest

  11. Custom Rates • Conducted survey in Fall 2008 • 47 responses • Used when creating enterprise budgets because fixed costs vary so much! • Rates include labor and fuel associated with the practice

  12. Net Income

  13. Variable Costs ($) + Fixed Costs ($) Unit Costs ($) = Units Produced (lbs, dozens, bag) Break Even Analysis Slide Adapted from: Dr. Wen-fei Uva Department of Applied Economics and Management Cornell University

  14. Landlord-Tenant Relationships University of Maryland Extension

  15. Communication Problems • Unclear message • Stereotyping • Incorrect Channels • Language • Lack of feedback • Poor listening skills • Interruptions and physical distractions University of Maryland Extension

  16. Guidelines for Tenants “Keeping the Landlord Happy” no different from an “Effective Public-Relations Strategy in any Business” University of Maryland Extension

  17. Public-Relations Strategy • Communicating with landlord • Educating landlord about agriculture • Explaining farm costs and their change • Providing regular crop reports during the growing season • Maintaining appearance of property • Treating landlord like family University of Maryland Extension

  18. Guideline for Tenants • Have a written lease • Resume` • Objectives • Cropping Plan • Regular Updates • Inform and Educate • Cost Information University of Maryland Extension

  19. Guideline for Tenants • Alert landlord of problems • Document in writing • Improve appearance • Acknowledge life events • Encourage landlord visits to your farm • PAY EXPLICIT ATTENTONTO THE NEXT GENERATION OF OWNERS! University of Maryland Extension

  20. Guideline for Landlords • Have a written lease • Ask questions • Provide information about objectives • Stay informed • Schedule yearly meetings • Be rational University of Maryland Extension

  21. Resume` • Biographical background • Statement of management objectives for the future • Experience • Environmental statement • Risk management strategies • Information – insurance coverage & limits • References University of Maryland Extension

  22. Resume` Frank Farmer 100 Better Farmer Lane Centreville, Maryland 21617 (410) 758-9999 Fax: (410) 758-9988 E-mail: ffarmer@baybroadband.net Education: B.S., Agriculture Studies, University of Maryland, 1983 Queen Anne’s County High School, 1979. Occupation: Farm owner and operator Communication: I publish a quarterly newsletter notifying those who I rent or crop share with of crop progress, market news, and new technologies I am incorporating into my operation. University of Maryland Extension

  23. Management Objectives: My agriculture management objective is to achieve the highest level of revenue on a parcel of land while simultaneously minimizing soil erosion, chemical runoff, and loss of production. I am involved in continued education of developing new technologies, and I am actively involved in adopting those new technologies that improve the economic viability of agriculture production. Experience, Advanced Training, and Organizations Farming Background Involved in farming 1,000 acres of crop land in QueenAnne’s, Talbot and Kent counties. • Own 400 acres • Rent 600 acres Typical yields: • Corn:135/bushel/acre (historical county yield - 100 bushel/acre) • Soybean: 45/bushel/acre (historical county yield - 43 bushel/acre) Advanced Training and Licenses Held • Attend approximately five workshops annually sponsored by the University of Maryland Extension and farm organizations • Private Pesticide Applicator License • Nutrient Applicator Voucher Organizations • Queen Anne’s County Extension Grain Marketing Club LEAD Maryland Foundation – Class IV • Queen Anne’s County Farm Bureau Environmental Statement My management practices include no-till planting to reduce soil erosion and leaching. I believe in the adoption of new technologies that prove both economically and environmentally beneficial to agriculture production. Risk Management Strategies I actively participate in a University of Maryland extension grain marketing club which allows me to hone my marketing skills. I subscribe to DTN AgDayta which allows for up-to-date price quotes and marketing recommendations. Insurance Coverage Nationwide Insurance. Contact Irene Insurer at 220 W. Water Street, Centreville,MD 21617, (Phone Number) for further information. University of Maryland Extension

  24. References Available Upon Request (see below) (Have these with you in case the landowner requests these while talking to him/her) - Separate Page- References Larry Landowner 1111 My Farm Lane Easton, MD 21601 Phone Number 410-822-0000 Albert Ag Lender MidAtlantic Farm Credit Main Street Chestertown,MD 21610 Phone Number 410778-9999 University of Maryland Extension

  25. University of Maryland Extension

  26. Summary • It is all about Communication • Be Professional • Relationships are important • Find the best means of communication for you and your business University of Maryland Extension

  27. Leases: Written Share the Risk University of Maryland Extension

  28. Farm Lease Agreement Written agreement Components University of Maryland Extension

  29. Lease Components: • Names of Parties and description of property • Term of Lease • Rental Rates and arrangements • a. Crop-share * • b. Cash Lease * • c. Flexible cash lease * • d. livestock share lease • e. Farm Machinery, equipment and building leases University of Maryland Extension

  30. Lease Components Cont.: • 4. Farm operating expenses • 5. Conservation and Improved Practices • 6. Improvements and repairs • 7. Records • No Partnerships statement • Right of Entry • Arbitration ( settlement) • Additional agreements and modifications • Signatures University of Maryland Extension

  31. You need to have a written agreement The purpose of this presentation is to provide tenants and landowners basic information needed to write rental agreements. Changes in the structure of production agriculture have increased the need for persons entering a contractual rental arrangement to have a written agreement. Additionally, rental agreements should be updated regularly to incorporate changes in government programs, environmental regulations, costs of production and revenue received University of Maryland Extension

  32. Value of a written lease The value of a written contract is in helping the prospective landowner and tenant think about and agree upon the essential considerations of leasing and operating the farm. To arrive at an equitable lease, the interested parties should talk over the basic considerations involved in the leasing arrangement and in managing the farm. They should then make a contract, preferably written, based on these considerations. University of Maryland Extension

  33. 1 – Names of parties and description of property • Every lease should identify the parties entering into • the lease contract and give the legal description of the • property or properties involved. In addition to the legal • description, information such as the distance and direction from town, road name, mailing address and popular name of the farm might be given. University of Maryland Extension

  34. 2 – Term of lease The term, or length of time the lease is to be in effect, should always be agreed on and should be stated in the contract. The term of the lease is important. A long-term lease is often necessary to develop a profitable business over time because of the need for permanent capital investments. The tenant will not want to share investment in permanent facilities on a short-term lease. Usually, landowners favor a short-term lease on the basis that a longer-term lease lowers the market value of the farm because it cannot readily be sold. This problem can be solved by including a termination clause that would apply in case the farm was sold. University of Maryland Extension

  35. The lease agreement can be for either a one-year lease or a longer lease, as desired. Most agreements include an automatic renewal clause and allow some flexibility in the terms of the lease if the parties under contract give adequate notice. Renewal: a multi year lease is automatically renewed unless a termination notice has been submitted. Lease dates: Typically a lease runs for a calendar year. However, this may vary University of Maryland Extension

  36. Termination of lease • It is recommended that a termination notice be given by July 1 of the growing season. • If termination is given, the operator has the right to harvest all crops currently growing on the given land. • If there are crop input costs for crops currently growing, these input costs should be addressed at the time of termination. University of Maryland Extension

  37. In some communities, it is customary to give notice that the lease is to be terminated before wheat sowing time in the fall or by March 1 in the spring. But failure of either party to give this notice does not necessarily indicate a desire that the lease be continued. Consequently, it is desirable to state in the contract the procedures to be followed for terminating or continuing the lease contract. University of Maryland Extension

  38. 3 – Rental rates and arrangements • Rental rates and arrangements for payment or disposition of the rent are a significant part of any lease, whether written or oral. • Basically, there are five methods of paying rent: • crop-share rent – “share crop” • livestock-share rent • cash rent • Flexible cash rent • farm machinery, equipment and buildings rent – “custom farming” University of Maryland Extension

  39. a. Crop-share rent – Characteristics of a crop-share • lease are that each party receives a share of the crop as • earnings for their contribution in land, labor and capital. • Payment could be in Bushels • Normally, crop-sharing involves grain crops such as • small grains, corn, and soybeans and land used to • participate in government programs. Remaining areas • used in producing forages (hay and pasture) are normally • cash rented. • The landowner’s share of the crop depends on the • contribution made toward production of the crop. When • crops are divided 50-50, the landowner normally pays • 50 percent of the cost of fertilizer, seed and chemicals in • addition to providing the land. In other instances, the • landowner may or may not share in cash production • costs and receives a 1⁄4 to 1⁄3 share of the crop as a return • to land. University of Maryland Extension

  40. . b. Livestock-share lease – Livestock-share leases vary considerably because of differences in contributions made to the business by each party. The owner normally furnishes land and buildings, while the tenant furnishes major portions of the crop machinery. Livestock is owned jointly. Production costs such as feed, veterinary and medicine, other livestock expenses, fertilizer, seed and chemicals are shared equally. Livestock machinery and equipment may be jointly owned. Labor costs are shared according to the agreement, as are repairs and upkeep on permanent buildings. The landowner usually pays for construction of permanent buildings, or arrangements are made to reimburse the tenant in case the lease is terminated. Livestock and crop sales are divided according to the terms of the agreement University of Maryland Extension

  41. c. Cash lease – The cash lease is normally uniform and • relatively simple. The tenant pays the landowner a cash • sum per acre or a lump sum for his or her investment • in farm resources. Provisions in the lease generally state • the terms of agreement. For example, the landowner • may place restrictions on the use of land or fields for certain • crops. Also, the agreement might state the degree • of productivity to be maintained. Provisions should also • state the amount and method of paying rent. • degree of productivity: The definition may need to be defined as part of the agreement. It is assumed that this definition reflects the soil nutrient values. Nutrient level, soil tilth, erosion and other soil parameters may also be addressed University of Maryland Extension

  42. d. Flexible cash lease – The flexible cash lease is a hybrid of the cash lease. The flexible cash lease agreement states that the tenant will pay in proportion to either or both the price and the yield level. There are many methods for flexing the rental agreement. The most common method is flexing gross (or net) revenue so that the tenant and landowner share the risks associated with cash renting. If revenue is greater than the established base level, the tenant and landowner share the excess revenue. If revenue is less than the established level, the tenant and landowner share the lost revenue. However, often there is a cash lease price floor that the landowner is guaranteed. Other types of flexible cash rental arrangements include flexing only price or yield or flexing both University of Maryland Extension

  43. e. Farm machinery, equipment and buildings leases – Renters have found that leasing unused resources can be cheaper than making new capital investments. Also, producers have found in certain situations leasing machinery and equipment from dealers can be cheaper than purchasing. Additionally, machinery and equipment leasing arrangements can be between renters and owners to allow the renter to avoid paying full value and the owner to generate revenue to cover the ownership costs. Renters need to compare the size, condition, obsolescence, use, location and lease cost of the capital good versus the cost of purchasing the capital good outright. Owners are primarily interested in recovering ownership costs. The lease price should equal the amount needed to cover ownership costs and variable costs, such as upkeep costs incurred from renting the capital good. Both renters and owners should consider current value, depreciation, interest, insurance and taxes, inflation, repairs and maintenance when agreeing on a lease value. University of Maryland Extension

  44. The cash lease is the most common. The second • most often used is the crop-share lease. Flexible rental • agreements are increasing in use as tenants seek • to share downside revenue risk with landowners and • landowners seek to capture upside revenue potential. • The rental arrangement for each specific farm should be • developed to fit the farm and the planned operating procedures. • These conditions are known best by the landowner and prospective tenant, so they should work out the most satisfactory arrangement between them. No standard lease form can be used to develop an equitable rental agreement. The function of the form is to record operating procedures agreed upon by the parties entering the contract. University of Maryland Extension

  45. 4 – Farm operating expenses Reaching agreement on farm operating expenses provides an opportunity for the tenant and landowner to discuss and designate the share of cash production costs that are to be paid by each party. We have shared Custom rates and budgets with you Soil Ph / Lime may fall into this area and needs to be addressed University of Maryland Extension

  46. 5 – Conservation and improved practices • To improve or maintain the productivity of the • farm, conservation and improved production practices • are usually warranted. Normally, conservation and • other improved farming practices require additional • labor and expenditures. Give important consideration • to questions such as who contributes the labor and cost • of implementing the practice and how these contributions affect income for both tenant and landowner. • CRP – cutting waterways – spraying noxious weeds University of Maryland Extension

  47. 6 – Hunting • Waterfowl and deer hunting provide a significant value to many farms on Delmarva. • Careful consideration must be given to liability issues as well as methods of hunting, frequency of hunting, trash from hunters, pit, stand and roadway maintenance and location. • The tenant must understand liability issues of the property owner • See additional issues and contract University of Maryland Extension

  48. 7 – Improvements and repairs • Misunderstanding is prevented by agreeing ahead • of time what repairs will be done, how much will be • done and what each party will furnish toward them. • In many instances, tenants provide equipment that • legally becomes permanent fixtures on the farm. • Disagreements can be avoided and the farm’s resources more fully used if both landowner and tenant agree on needed improvements. • Roadways, fencing, and machinery storage fit this need. • Goose pit construction may also fit this area University of Maryland Extension