Farm Leasing Arrangements

Farm Leasing Arrangements

Tim EggersField Agricultural Economist

[email protected]

712-542-5171

www.extension.iastate.edu/feci

Agenda• Iowa Nutrient Reduction Strategy• Flexible cash leases• Landlord liens• Agricultural Act of 2014• CSR2 use • Bioenergy (CENUSA, POET, DUPONT)• Beginning Farmer Tax Credit• Trends in

– Farm land values– Cash rental rates– Costs of Production

Situation• Increasing concern about the quality of

local and regional waters• Substantial demand for agricultural

products• 2008 Hypoxia Action Plan

– development and implementation of N and P reduction strategies for Mississippi/Atchafalaya River Basin states

Cost of Lost Soil and Nutrients

• Loss of in-field productivity

• Off-site water quality impacts, locally and in the Gulf of Mexico

• Eventual decline in land value

Duffy, 2013

Why? And why now?• Iowa’s productive soils and cropping systems

also contribute to water quality concerns• Society and EPA expect more from cities,

industry and agriculture• Gulf Hypoxia Task Force requires plan to

reduce N and P load to Gulf by 45%• EPA requests strategy that emphasizes state

implementation of new and existing N and P practices for point and non-point sources

What is the Iowa Nutrient Reduction Strategy?

• Voluntary, science-based program to reduce Nitrogen and Phosphorous impact on water

• Includes cities, industry and agriculture• A practice-based approach to show

meaningful and measureable progress• A framework for innovation and verification

of new practices and technologies

Can we achieve the nutrient reduction goals for Gulf of Mexico Hypoxia?

• Not simple – Not as simple as just fine-tuning

nutrient management

• Not impossible

Many Options

Nitrate-N Reduction Practices 

Practice % Nitrate-N Reduction [Average (Std. Dev.)]

% Corn Yield Change

Nitrogen Management

Timing (Fall to spring) 6 (25) 4 (16)Nitrogen Application Rate (Reduce

rate to MRTN) 10 -1

Nitrification Inhibitor (nitrapyrin) 9 (19) 6 (22)

Cover Crops (Rye) 31 (29) -6 (7)

Land Use

Perennial – Pasture/Land retirement 85 (9)

Perennial – Energy Crops 72 (23)

Extended Rotations 42 (12) 7 (7)

Edge-of-Field

Controlled Drainage 33 (32)*

Shallow Drainage 32 (15)*

Wetlands 52

Bioreactors 43 (21)

Buffers 91 (20)**

*Load reduction not concentration reduction**Concentration reduction of that water interacts with active zone below the buffer

Phosphorus Reduction Practices 

Practice% Phosphorus-P

Reduction [Average (Std. Dev.)]

% Corn Yield Change

Phosphorus Management

Producer does not apply phosphorus until STP drops

to optimal level17 (40) 0

No-till (70% residue) vs. conventional tillage (30%

residue)90 (17) -6 (8)

Cover Crops (Rye) 29 (37) -6 (7)

Land UsePerennial – Land retirement 75 (-)

Pasture 59 (42)

Edge-of-FieldBuffers 58 (32)

Terraces 77 (19)

Assessment did not include stream bed and bank contributions although recognized as significant

Nutrient Value of Lost Soil

• Each ton of soil contains an estimated– 2.32 pounds of Nitrogen @ $0.44 per pound – 1 pound of Phosphorus @ $0.43 per pound

• Value in nutrients = $1.45 per ton of soil• Average Iowa farm is 333 acres• $2,414 in lost nutrients alone, per year

Duffy, 2013

Summary• To achieve goals will require a

combination of practices – conservation systems approach

• N versus P may require different practices• Multiple benefits and costs of practices

need to be considered• Targeting of practice placement will be

critical (Precision Conservation)

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

90

110

130

150

170

190

210

230

250

270

Crop Share

Cash

Flex Rent

$ per acre

Crop Share vs Cash vs Flex

Flexible Cash Lease

• Rent is paid in cash• Actual rent paid each year is determined

by a formula that includes any or all of:– Actual price– Actual yield– Costs of production

• Also called “variable” cash leases

Reasons for Flexible Leases

• Fewer landowners and tenants want to be involved in crop share leases

• Still recognize a need for sharing risk• Prices and yields have been volatile in

recent years• Cash rents have lagged behind profits in

crop production• Neither party enjoys renegotiating annually

Direct Corn Expenses

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200Seed Insecticide Herbicide Fertilizer & Lime Drying & Storage

Direct Bean Expenses

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

10

20

30

40

50

60

Seed Insecticide Herbicide Fertilizer & Lime Drying & Storage

Prevalence of Flexible Leases

• Iowa land tenure surveys– 1993: 3.5% of cash rented acres– 2003: 11% of cash rented acres– 2007: 12% of cash rented acres– 2012: 16% of cash rented acres

Types of Flexible Cash Farm Leases

• Option A: Rent = % of gross revenue• Option B : Rent = base rent + bonus

– Bonus = (Gross Crop Revenue – Base Crop Cost Estimate) x %

– Base Crop Cost Estimate = Input costs + Base rent

2010 2011 2012 2013 2014* $150

$170

$190

$210

$230

$250

$270

$290

$310

$330

$350

Base RentPercent of GrossBase Rent + Bonus

Assuring the Rent is Paid

• How can parties assure one another that the rent will be paid?

First Step? -- Use a written lease.And, be sure that:

(1)The legal description and parcel number in the lease is accurate.

(2) The parties to the lease are properly identified.

(3) The lease terms are clear.

Landlord’s Lien Law• Iowa’s Landlord Lien Law went into

effect on July 1st, 2001– Applies to existing farm leases– Gives landowners priority in collecting rent

owed by their farm tenants– Landowner must have filed a Uniform

Commercial Code (UCC) with Secretary of State where tenant does primary business

Landlord’s Lien Law

• Amended by the Iowa General Assembly in 2002– UCC Financing Statement, once filed,

continues to be effective until a termination statement is filed so long as the parties (landlord and tenant) remain the same.

Landlord Lien Law

• A financing statement filed to perfect a lien in farm products must include a statement that it is filed for the purpose of perfecting a landlord’s lien.

• Must be filed with Secretary of State within 20 days of when the lease goes into effect

Should you “do it yourself”?

• Just having the language in the lease is not enough.• Creation, filing and perfection of a Landlord Lien is

a complicated legal procedure involving intricacies of Iowa law (Iowa Code ch 570 and related sections) and Uniform Commercial Code (UCC) (Iowa Code ch 554).

• Owner-Landlords who wish to do this may find it advisable to hire an attorney to be certain that all legal documents and procedures are correctly followed.

https://sos.iowa.gov/business/FormsAndFees.html#UCC

The Agricultural Act of 2014

Base AcresKeep current base acres or do a one-time

“reallocation” of base acresReallocation allowed to covered

commodities planted between 2009 and 2012

Reallocation in proportion to the ratio of 4-yr average plantings/prevented plantings

Total number of base acres limited to total of existing base acres

Payment YieldsKeep current CCP payment yield or do a

one-time “update” of payment yield on a commodity-by-commodity basis

Update: 90% of 2008-2012 yield per planted acre on the farm

If the farm yield is below 75% of the 2008-2012 average county yield, then the farm yield is replaced by 75% of the 2008-2012 average county yield

Price Loss Coverage (PLC)Price-based support program

Works like CCP

Payment rate = Max(0, Reference price – Max(Marketing year average price or

Loan rate))

Reference prices are:Corn $3.70, Soybeans $8.40

PLC vs. CCP and DP

Agriculture Risk Coverage (ARC)Revenue-based support program

Revenues based on 5-year Olympic average yields and prices

Triggers at county or individual farm level, instead of state level

ARC choice:Individual ARC: crop revenues are combinedCounty ARC: revenues are crop-by-crop

Supplemental Coverage Option (SCO)An additional policy to cover “shallow losses”

Shallow loss = part of the deductible on the producer’s underlying crop insurance policy

SCO has a county-level payment trigger

Indemnities are paid when the county experiences losses greater than 14%

Premium subsidy: 65%

Starts in 2015

Can’t have ARC and SCO together

Three ChoicesPLC + SCO

Price protection with top-up county-level insurance protection, paid on 85% of base

ARC-CountyCounty-level revenue protection based on

historical averages, paid on 85% of baseARC-Individual

Farm-level revenue protection based on historical averages, paid on 65% of base

Once chosen, locked in until 2018

Two WavesFirst wave: Choice on base acreage and

yield updatingProbably occurs late summer timeframe

Second wave: Choice on farm bill programsProbably late fall/early winterHarvest the crop and farm bill at the same time

Bioenergy Options New farm bill

pushes land out of CRP

Energy laws require more bioenergy content

Perennial grass crops provide environmental & energy benefits

New Bioenergy Grasses Developed Liberty, a new

switchgrass variety, enters the market in 2016

Liberty yields 40% more traditional switchgrasses

Designed for bioenergy

http://www.usda.gov/nass/PUBS/TODAYRPT/land0814.pdf

AgLetterFederal Reserve Bank of Chicago

Realtors Land InstituteMarch 2014 Survey

Statewide Average

$8,716up 5.1%up $420

High Grade Land

$10,828up 6.3%up $646

Medium Grade Land

$8,047up 3.5%up $274

Low Grade Land

$5,298 up 3.5%up $179

Northwest

$10,960 up 2.8%up $83

high $12,824 med $9,918 low $6,845

down 3.9%down $445

North Central

$9,818 up 2.7%up $258

high $11,159 med $8,824 low $6,421

Northeast

$9,161 up 7.5%up $638

high $11,423 med $8,573 low $5,670

West Central

$9,449 up 2.5%up $233

high $11,591med $8,725low $5,926

Central

$9,877 up 5.5%up $512

high $11,803med $8,930low $5,918

East Central

$9,327up 10.8%up $906

high $11,631med $8,567low $5,449

Southwest

$7,531 up 7.4%up $517

high $9,591med $7,137low $4,592

South Central

$4,791 up 11.2%up $483

high $7,150med $4,715low $2,843

Southeast

$6,994 up 13.3%up $822

high $9,785med $6,605low $3,651

POSITIVE FACTORSaffecting land values

Interest rate

s

Comm

odity prices

Good farm econom

y

Land availability

Cash available

Yields

Strong dem

and

0%

10%

20%

30%

40%

50%

60%56%

37%

24%

15% 14% 13%11%

NEGATIVE FACTORS affecting land values

Low comm

odity prices

Weathe

r

Poor yields

Govt program

s

Uncertainty

Long term interest rate

s0%

10%20%30%40%50%60%70%80%

76%

21%

13% 11% 10% 10%

WHO PURCHASED farmland

Investors 18%

Existing Farmers 78%

New Farmers 3%

Others1%

WHO PURCHASED farmland

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

SALES ACTIVITYrelative to previous year

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0%

10%

20%

30%

40%

50%

60%

70%

sales activity from previous yearCHANGE IN

More – 9% Less – 59%Same – 33%

More – 16%Less – 53% Same – 31%

More – 16%Less – 48%Same – 36%

More – 8%Less – 71%Same – 20%

More – 20% Less – 45%Same – 35%

More – 18% Less – 40%Same – 41%

More – 15%Less – 47%Same – 38%

More – 20%Less – 43%Same – 37%

More – 19%Less – 29%Same – 52%

Average corn/soybean rent/acre

$294$283$281

$294 $297 $284

$257 $210 $229

UPDATE

Other Factors• Fertility and drainage• Size and shape of fields, % tillable• USDA program bases and yields• Local grain prices and basis• Seed production contracts• Manure application contracts• Longevity of lease• “Extras” done by tenant

Estimating a Cash Rental Rate

• Ag Decision Maker information file C2-20• Decision Aid file C2-20 (spreadsheet)

Flexible Cash Leases• Ag Decision Maker information file C2-21• Decision Aid file C2-21 (spreadsheet)

Power Machinery Cost and Investment Cost (Per Acre)

2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

50

100

150

200

250

300

350

400

450

500

Mach & Power Investment Mach & Power Cost

1.Market Cash Rent

Page County

Overall average $ 232

High Quality Third = $ 293Middle Quality Third =$ 227Low Quality Third = $ 176

Calculating Cash Rent

UPDATE

2 a. Average Rents Per Unit – Corn Yield

Page County

Determine Average Rent for Corn

Farm’s Average Corn Yield (bu/A) 147X rent per bushel of Corn yield $ 1.57= Average Rent for Corn Acre $ 231

Calculating Cash Rent

http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx

UPDATE

2 b. Average Rents Per Unit – Soybean Yield

Page County

Determine Average Rent for Soybeans

Farm’s Average Soybean Yield (bu/A) 46 X rent per bushel of Soybean yield $ 5.10= Average Rent for Soybean Acres $ 235

Calculating Cash Rent

http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx

UPDATE

2. Average Rents Per Unit – Corn & Soybeans

Add the Average Rent for Both

Corn Average Rent $ 231Soybean Average Rent $ 235

Average Rent Corn & Soybeans $ 233

Calculating Cash Rent

UPDATE

3.Average Rents Per CSR Index Point

Page County

Determine the Average Cash Rent using CSR

Farm’s Average Corn Suitability Rating 71X rent per CSR index point $3.27= Rent for all Row Crop Acres $ 232

Using Corn Suitability Rating (CSR)

http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx

UPDATE

Return on Investment Method

Page county farm estimated to have a market value of $6,558 per acre.Expected Rent: (3.4%) X $6,558 / acre = $223 / acre

UPDATE

Average all 4 Methods (Page County)

Method 1: Typical Cash Rent $ 232Method 2: Average Rents per Unit $ 231Method 3: Average Rents per CSR Index Point $ 232Method 4: Return on Investment $ 223

Average $230/A

$230 /A X 125 Tillable Acres = $28,750

Split Payments of $14,375 and $14,375

Overall Average

UPDATE

Additional Methods of Farmland Lease Valuation

5. Gross Income Method

6. Tenant Residual Method

7. Crop Share Method

Share of Gross Income

CORN: (147 bu X $5.91) + $22 = $ 891SOYBEANS: (46 bu X $12.32) + $22 = $ 589Iowa 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: $ 891/ ac x 23% = $ 205SOYBEANS: $ 589/ ac x 34% = $ 200

Average $ 203

UPDATE

Tenant Residual Method

CORN: $ 891 - $ 552 = $ 339

SOYBEAN: $ 589 - $ 322 = $ 267

Average: $ 303

20% lower prices or yields $ 159

UPDATE

Landlord Tenant

Land

½ inputs

Labor

½ inputs

Machinery

Management

½ income ½ income

Crop Share 50-50 Lease

Landlord Tenant

Land $261

½ inputs $185

Labor $ 31

½ inputs $185

Machinery $ 92

Management $137

½ income $445 ½ income $445

Crop Share Corn Lease 2013 Corn

UPDATE

Landlord Tenant

Land $213

½ inputs $ 82

Labor $ 27

½ inputs $ 82

Machinery $ 72

Management $113

½ income $294 ½ income $294

Crop Share 50-50 Lease 2013 Soybean

UPDATE

Cash Rent SurveyPer Bushel YieldPer CSR PointReturn on InvestmentGross IncomeTenant ResidualCrop Share

Average

Corn Soybeans

$232 $232 $231 $235 $232 $232 $223 $223 $205 $200 $339 $267 $261 $213

$238

UPDATE

Thank You!

Tim EggersField Ag Economist

(712) [email protected]

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