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Farmland Values and Leasing Key Questions Chapter 20 §What determines the value of farmland? §What are the advantages and disadvantages of owning vs. leasing?

Dec 14, 2015

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Farmland Values and Leasing Key Questions Chapter 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? Slide 2 Slide 3 Land Value Trends in Iowa 1973-1981 l Increased export demand l High grain prices l Low interest rates l High inflation rate Slide 4 1982-1986 l Higher interest rates l Lower inflation l Weather problems l Forced sales Since 1986 l Farm economic recovery l Government payments l Higher yields l Lower interest rates Slide 5 Who Buys Iowa Farmland? Slide 6 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. Slide 7 Key Questions in Analyzing a Land Purchase Does it fit in with the operation? l Labor supply l Machinery l Livestock l Location Is it worth the asking price? l Will the potential income support it? l How is it priced relative to the market? Slide 8 Land Valuation: Capitalization 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% Slide 9 Net Returns to LandCornSoybeans Average Yield16552 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 Slide 10 Capitalized Land Value Land value = $132 /.04 = $3,300 per acre Slide 11 Farmland values depend on: 1.Productivity (supply of crops) 2.Costs of production 3.Crop selling prices (demand) 4.Interest rates 5.Inflation 6.Alternative investments Slide 12 Comparative Sales Recent actual sales Similar land Same area Slide 13 Comparative Sales Factors to compare: Productivity+ Location+ or - Other uses/income + or - Family sales- Sales contract+ Size of tract+ or - Slide 14 Value Based on Productivity CSR Rating X$ per CSR point =Estimated value Example: Comp. sales averaged $50 per CSR point $50/ CSR point x 80 CSR = $4,000 Slide 15 Adjust for % Tillable Example: 75 acres tillable out of 80 = 93.75% $3,000 x 93.75% = $3,750 per acre Slide 16 Financial Analysis of a Land Purchase Where can I obtain financing? l Equity (savings) l Credit l Installment contract Will it cash flow? l On its own? l With help from other sources? Slide 17 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) Slide 18 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 Slide 19 Farmland Leasing in Iowa Land Farmed by owner46% Farmed by tenant54% Types of Leases--acres Cash69% Crop Share30% Other 1% Slide 20 Own vs. Rent Ownership Security Inflation hedge Pride Build equity Loan collateral Rental Flexibility Lower cash cost No investment Larger scale Slide 21 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 Slide 22 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? Slide 23 Estimating a Fair Rent % of gross income (typically 35 to 40 %) C: ($396 + $24) x 35% = $147 SB: ($312 + $24) x 40% = $134 Slide 24 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 Slide 25 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 Slide 26 Flexible Rent Example Rent = % of Gross Revenue Typical: 30-40% (165 bu. @ $2.40 + $24) x 35% = $158 (100 bu. @ $2.80 + $24) x 35% = $106 (200 bu. @ $2.50 + $24) x 35% = $183 -Usually include government payments. -May set a minimum and maximum rent. Slide 27 Crop Share Leases Tenant and owner divide crop l 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 Slide 28 Evaluating a Share Lease Corn TotalTenantOwner 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$226 Share 100%48%52% Slide 29 Slide 30 Slide 31 Developing a Good Lease Discuss details and put it in writing Treat the land as if it were your own Communicate frequently Consider environmental effects Go the extra mile The tenant that will pay the most is not always the best Slide 32 Custom Farming Operator supplies labor and machinery, only May buy supplies, choose inputs, etc. Receives a fixed payment, sometimes a bonus or % of crop Owner takes all the risk Slide 33 Livestock Share Lease Crop costs split same as crop-share lease Owner provide buildings, pasture, stationary equipment Tenant provides movable equipment, labor Divide livestock, feed, operating costs Divide income equally Not very common now Slide 34 Contract Farming Usually involves growing specialty crops l high oil corn, seed corn, organic grains, etc May receive a fixed payment May receive a guaranteed price Must meet quality standards Management requirements are stricter May need separate storage Need a guaranteed market Slide 35 Contract Finishing Operator provides buildings, labor, operating costs Contractor provides animals, feed, health services, marketing Operator receives a fixed payment per animal or space. May have a bonus. Limited risk, limited returns Slide 36 Custom Feeding (mostly cattle) Operator supplies feedlot, labor, feed, and all operating expenses Owner of cattle pays a yardage fee ($ per head per day) plus health costs, feed costs, transportation