Farm Leases Tim Eggers Field Ag Economist Southwest Iowa [email protected] 712 542 5171.

Farm Leases

Tim Eggers

Field Ag Economist

Southwest Iowa

[email protected]

712 542 5171

Tools

• Ag Decision Maker– Decision Aids

• Annual Surveys• Publications

– Decision Tools

• Agricultural Management e-School– Farm Leasing Arrangements course

• Non ISUE on-line resources• Face-to-Face resources

Top Issues

• Land Values

• Cash Rental Rates

• Custom Rates

• Leasing Practices

• Crop-Share Leases

• Calculating a Cash Rent Lease

• Modified Crop-Share Leases

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

Leasing Practices

Crop Share Practices

Leasing OpportunitySoil Type: Acres: Percent: CSR---------- -------- -------- -----T370B 61.47 23.2% 85248 17.72 6.7% 60T368 16.70 6.3% 90212 11.71 4.4% 91T369 87.78 33.1% 85133 9.69 3.7% 80220 60.11 22.7% 85---------- -------- -------- -----Totals 265.19 100.0% 83.73

Iowa Corn Suitability Rating based yield estimation: 179 bushels per acre

Determining A “Fair” Cash Rent

Value

Location: Page CountyTillable Acres: 265 AcresCorn Yield: 179 bu/AcreSoybean Yield: 49 bu/ACorn Suitability Rating: 84 CSR

Supporting Information

Cash Rent Market ApproachISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2006 Survey (released in May)

Three Methods for Determining Cash Rent Values

Typical Cash RentAverage Rent for ProductionAverage Rent for Corn Suitability Rating (CSR)

Calculating Cash Rent Values

1.Typical Cash Rent

Select the Area of the State/County

Area 10 County Page

Determine Overall average $ 120 /A

High Quality Third = $ 139 /AMiddle Quality Third = $ 119 /ALow Quality Third = $ 104 /A

Calculating Cash Rent

2 a. Average Rents Per Unit – Corn Yield

Select the Area of the State/County

Determine Average Rent for Corn

Farm’s Average Corn Yield (bu/A) 179Times rent per bushel of Corn yield $0.89Equals the Average Rent for Corn Acre $ 159./A

Calculating Cash Rent

2 b. Average Rents Per Unit – Soybean Yield

Select the Area of the State/County

Determine Average Rent for Soybeans

Farm’s Average Soybean Yield (bu/A) 49Times rent per bushel of Soybean yield $2.84Equals the Average Rent for Soybean Acres $139/A

Calculating Cash Rent

2.Average Rents Per Unit – Corn & Soybeans

Add the Average Rent for Both

Corn Average Rent $ 159/ASoybean Average Rent $ 139/A

Average Rent Corn & Soybeans $ 149 /A

Calculating Cash Rent

3. Average Rents Per CSR Index Point

Select the Area of the State/County

Determine the Average Cash Rent using CSR

Farm’s Average Corn Suitability Rating 84Times rent per CSR index point $1.61Equals the Average Rent for all Row Crop Acres

$ 135 / A

Using Corn Suitability Rating (CSR)

Source: ISU Extension Publication FM- 1851

Source: ISU Extension Publication FM- 1851

Average all 3 Methods

Method 1: Typical Cash Rent $139 /AMethod 2: Average Rents per Unit$149 /AMethod 3: Average Rents per CSR Index Point $135 /A

Total all Methods and divide by 3 $141 /A

$141 /A X 265 Tillable Acres = $37,365

Split Payments of $18,682 and $18,682

Overall Average

Gross Income MethodTenant Residual MethodMarket Productivity MethodCrop Share MethodReturn on Investment Method

Crop Lease Comparison

(a) Assumptions: 265 crop acres, 179 bushel corn yield, 49 bushel Soybean yield,

(b) Corn Market Price $2.20 / bu, Soybean Market Price $5.25 / bu,

(c) Direct Government Payments average $22.00 / acre

Share of Gross IncomeCORN: 179 bu X $2.20 + $30.00 = $424.75SOYBEANS: 49 bu X $5.25 + $15.00 = $281.70

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 RateCORN: $424.75/ac X 35% = $ 148.66SOYBEANS: $281.7/ac x 45% = $ 126.77

Tenant Residual Method

CORN: $424.75 – $286.51 = $138.24/ac

SOYBEAN: $281.70 - $207.12 = $74.58/ac

Average: $106.29/ac

Crop Share Method 50-50 Share

Expense:Corn: 50 % x $175 = $87.50 Soybeans: 50 % x $114 = $57

Equivalent Rent:Corn: $212.38 / acre - $87.50 / acre = $124.88 / acreSoybean: $140.58 / acre - $57 / acre = $83.85 / acreAverage: $104.37 / acre

(1) The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime,

pesticides, crop insurance, interest and miscellaneous, and drying and storage.

Income:Corn: 50 % x $424.75 = $212.38 Soybeans: 50 % x $281.70 = $140.58

Return on Investment Method

Iowa farm estimated to have a market value of $2,962 per acre.Expected Rent: 0.047 (4.7%) X $2,962 / acre =

$139.21 / acre gross income

Rent as a Percent of Value for Iowa Farm Land

0%

2%

4%

6%

8%

10%

12%

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Cash Rent SurveyPer Bushel YieldPer CSR PointGross IncomeTenant ResidualCrop ShareReturn on Investment

Average

Corn Soybeans

All Average: $130 Based on this information: Most likely agreed upon cash rent: ?????

$139 $139$159 $139$135 $135$149 $127$138 $ 75$125 $ 84$139 $139

$141 $120

Landlord Tenant

Land

½ inputs

Labor

½ inputs

Machinery

Management

½ income ½ income

Crop Share 50-50 Lease

Landlord Tenant

Land $124

½ inputs $88

Labor $39

½ inputs $88

Machinery $55

Management $30

½ income $212 ½ income $212

Crop Share 50-50 Lease

Landlord Tenant

Land $139

½ inputs $73

Labor $25

½ inputs $103

Machinery $55

Management $29

½ income $212 ½ income $212

Shift the tech fee or chemicals to tenant to balance up the ratio

Crop Share 50-50 Modified Lease

Cash Rent

Land $140Labor $ 30Inputs $150Machinery $ 65Management $ 20

Total $405

150 bu corn $400or

50 bu SB $300Ave $350

Expenses Income

Cash Rent

Land $140Labor $ 30Inputs $150Machinery $ 65Management $ 20

Total $405

150 bu corn $400or

50 bu SB $300Ave $350

Expenses Income

Either find economies of scale orPlay take away !!Where do we start ???

Cash Rent

Land $140Labor $ 10Inputs $145Machinery $ 35Management $ 00

Total $330

150 bu corn $400or

50 bu SB $300Ave $350

Expenses Income

I can still make it work and I can spend $10 on crop insurance to lock it in !!!Well maybe !!!

Machinery costs

Fixed costs Variable costs

Depreciation

Interest

Storage

Insurance

Repairs

Labor

Fuel

$100 per hour

Low Third $33.30 $32.52

Mid Third $54.53 $53.50

High Third $86.77 $84.60

IFBA 2004 Machinery Costs

Corn SoybeansAverage

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/

• Private Consultation– http://www.extension.iastate.edu/ag/fsfm/fsfarmmg.html

Land 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

Farm Lease Arrangements

A.M.E.S.

Agricultural Management e-schoolAn ISU Extension Outreach Institute

A.M.E.S.

Agricultural Management e-schoolAn ISU Extension Outreach Institute

Purchase Plan

• Land Value Trends • Using Soils Information • Appraisal Techniques • Financing Considerations • Feasibility of a Land Purchase

Farmland Ownership

Thank You!

Tim EggersField Ag Economist

ISU Page County Extension

311 East Washington

Clarinda, Iowa 51632

(712) [email protected]

www.extension.iastate.edu/feci

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