Farmland Values and Leasing Key Questions Chapter 20

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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?

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Land Value Trends in Iowa

• 1973-1981
• Increased export demand
• High grain prices
• Low interest rates
• High inflation rate

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• 1982-1986
• Higher interest rates
• Lower inflation
• Weather problems
• Forced sales
• Since 1986
• Farm economic recovery
• Government payments
• Higher yields
• Lower interest rates

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Who Buys Iowa Farmland?
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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.

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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?

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Land ValuationCapitalization of Earnings

• 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

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• Net Returns to Land Corn Soybeans Average
• Yield 165 52
• 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 25 23
• Total nonland costs 276 168 222
• Property taxes, etc. 24
• Net return to land 132

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Capitalized Land Value

• Land value 132 / .04 3,300 per acre

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Farmland values depend on

• Productivity (supply of crops)
• Costs of production
• Crop selling prices (demand)
• Interest rates
• Inflation
• Alternative investments

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Comparative Sales

• Recent actual sales
• Similar land
• Same area

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Comparative SalesFactors to compare

• Productivity
• Location or -
• Other uses/income or -
• Family sales -
• Sales contract
• Size of tract or -

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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

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Adjust for Tillable

• Example
• 75 acres tillable out of 80 93.75
• 3,000 x 93.75 3,750 per acre

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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?

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Cash Flow Analysis

• 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)

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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

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Farmland Leasing in Iowa

• Land
• Farmed by owner 46
• Farmed by tenant 54

• Types of Leases--acres
• Cash 69
• Crop Share 30
• Other 1

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Own vs. Rent

• Ownership
• Security
• Inflation hedge
• Pride
• Build equity
• Loan collateral

• Rental
• Flexibility
• Lower cash cost
• No investment
• Larger scale

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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

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Estimating a Fair Rent

• Tenants Residual (max. to pay)
• gross income - nonland costs
• gross income 378
• nonland costs 222
• residual 156
• Machinery fixed costs? Labor?

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Estimating a Fair Rent

• of gross income
• (typically 35 to 40 )
• C (396 24) x 35 147
• SB (312 24) x 40 134

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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

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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

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Flexible Rent Example

• Rent of Gross Revenue
• Typical 30-40
• (165 bu. _at_ 2.40 24) x 35 158
• (100 bu. _at_ 2.80 24) x 35 106
• (200 bu. _at_ 2.50 24) x 35 183
• -Usually include government payments.
• -May set a minimum and maximum rent.

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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

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Evaluating a Share Lease

• Corn Total Tenant Owner
• 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

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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

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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

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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

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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

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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

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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