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Farmland Leasing Economics 333. Types of Rental Arrangements Cash Rent Flexible Cash Rent Crop Share 50-50Tenant & Landlord 67-33Tenant & Landlord Custom

Dec 14, 2015

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Farmland Leasing Economics 333 Slide 2 Types of Rental Arrangements Cash Rent Flexible Cash Rent Crop Share 50-50Tenant & Landlord 67-33Tenant & Landlord Custom Farming Slide 3 Slide 4 Cash Rent Simple, few chances for confusion Owner does not need to make day to day decisions Owner has limited risk Tenant has more freedom in planning Tenant has fewer records to keep Slide 5 How Much Rent to Pay? Or Charge? Based on survey results Based on expected yields Based on CSR Based on % of gross income Based on return on investment Based on crop share equivalent Based on tenants residual Slide 6 Location:Iowa County Acres280 acres Tillable Acres:264 Acres Corn Yield:179 bu/Acre Soybean Yield:54 bu/A Corn Suitability Rating:84 CSR Supporting Information Slide 7 Expected Prices Local forward contracting opportunities Futures prices minus basis Outlook information Past averages Example:Corn$3.75/bu Soybeans$8.60/bu Slide 8 Expected Prices and Costs CornSoybeans Seed$100$57 Fertilizer + lime $119$97 Pesticides$35$30 Crop insurance $20$12 Interest + misc. $24$20 Fuel, repairs $31$21 Machinery own. $35$26 Drying, storage $23$0 Labor + mgmt. $46$39 Total$433$302 Slide 9 Cash Rent Market Approach Ag Decision Maker website http://www.extension.iastate.edu/agdm/ http://www.extension.iastate.edu/agdm/ Cash Rental Rates for Iowa 2010 Survey (file C2-10) Calculating Cash Rent Values Slide 10 Slide 11 1.Typical Cash Rent Select the Area of the State/County Area 6County Iowa Determine Overall average$193 High Quality Third =$ 224 Middle Quality Third =$ 195 Low Quality Third =$ 161 Calculating Cash Rent Slide 12 2 a.Average Rents Per Unit Corn Yield Select the Area of the State/County Determine Average Rent for Corn Farms Average Corn Yield (bu/A) 179 Times rent per bushel of Corn yield $ 1.13 Equals the Average Rent for Corn Acre $ 202 C. Expected Yield, Corn Slide 13 2 b.Average Rents Per Unit Soybean Yield Select the Area of the State/County Determine Average Rent for Soybeans Farms Average Soybean Yield (bu/A) 54 Times rent per bushel of Soybean yield $3.76 Equals the Average Rent for Soybean Acres $ 203 C. Expected Yield, Soybeans Slide 14 3.Average Rents Per CSR Index Point Select the Area of the State/County Determine the Average Cash Rent using CSR Farms Average Corn Suitability Rating 84 Times rent per CSR index point $ 2.51 Equals the Average Rent for all Row Crop Acres $ 211 D. Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851 Slide 15 Web Soil Survey Home http://websoilsurvey.nrcs.usda.gov/app/HomePage.htm Slide 16 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 Slide 17 Slide 18 A. Share of Gross Income CORN:(179 bu X $3.75) + $25 = $696 SOYBEANS: (54 bu X $8.60) + $25 = $489 Iowa cash rents typically are equal to about 30 to 40 percent of the gross income from producing corn, and 40 to 45 percent of the gross income from producing soybeans. Cash Rental Rate CORN:$ 696/ac x 30% = $ 209 SOYBEANS:$ 489/ac x 40% = $ 196 Slide 19 B. Tenant Residual Method CORN:$ 696 - $433 = $ 264 SOYBEAN: $ 489 - $302 = $ 187 Average: $ 225 Slide 20 E. Return on Investment Iowa County farm estimated to have a market value of $4,183 per acre. Expected Rent: (4%) X $ / acre = $167 / acre Slide 21 Survey Average Rents per bushel Average Rents per CSR Index Point Percent of gross crop value Tenants residual What is a fair rent? Slide 22 Flexible Cash Rent Flexible Cash Rent Limited risk for landlord Landlord can participate in increased prices and yields Payment is in cash, do not need to market crops Do not need to renegotiate each year Slide 23 Flexible Rent: Type 1 No base rent or base revenue Rent = Actual yield x actual price x 33% No maximum or minimum rent Example: Actual corn yield = 185 bu/acre Closing corn bids at Williamsburg elevator Oct. 1$3.84 Oct. 1$3.84 Nov. 1$3.74 Nov. 1$3.74 Dec. 1$3.70 Dec. 1$3.70 Average$3.76 Average$3.76 Rent = 185 bu. x $3.76 x 33% = $230 Slide 24 Flexible Rent: Type 2 Rent = Base rent + 50% of profit Base rent = $150 Nonland costs of production = $302 (beans) Total cost including base rent = $462 Actual gross = (60 bu. x $8.15) + $25 = $514 Profit = $514 - $462 = $52 Rent = $150 + (50% x $52) = $176 Slide 25 Crop Share Crop & Price risk are shared equally A second USDA payment limitation is created Crop Share Percentages 50-50Tenant & Landlord 67-33Tenant & Landlord Possible self employment tax for landlord Slide 26 LandlordTenant Land inputs Labor inputs Machinery Management income Crop Share 50-50 Lease Slide 27 Custom Farming Very little financial risk for operator Owner benefits from higher prices, government programs Only one party markets grain Agreements are simple and straight forward Tax implications- self employment Timing of operations can be troublesome

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