Farmland LeasingFarmland Leasing

Economics 333Economics 333

Types of Rental Types of Rental ArrangementsArrangements

Cash RentCash RentFlexible Cash RentFlexible Cash RentCrop ShareCrop Share

50-5050-50 Tenant & LandlordTenant & Landlord67-3367-33 Tenant & LandlordTenant & Landlord

Custom FarmingCustom Farming

Distribution of Iowa Farmland by Tenure Type

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Owner operator Cash rent Crop share rent

1982 1992 2002 2007

Cash RentCash Rent Simple, few chances for confusionSimple, few chances for confusion Owner does not need to make day to Owner does not need to make day to

day decisionsday decisions Owner has limited riskOwner has limited risk Tenant has more freedom in planningTenant has more freedom in planning Tenant has fewer records to keepTenant has fewer records to keep

How Much Rent to Pay? Or Charge?How Much Rent to Pay? Or Charge?

Based on survey resultsBased on survey results Based on expected yieldsBased on expected yields Based on CSRBased on CSR Based on % of gross incomeBased on % of gross income Based on return on investmentBased on return on investment Based on crop share equivalentBased on crop share equivalent Based on tenant’s residualBased on tenant’s residual

Location: Iowa CountyAcres 280 acresTillable Acres: 264 AcresCorn Yield: 179 bu/AcreSoybean Yield: 54 bu/ACorn Suitability Rating: 84 CSR

Supporting Information

Expected PricesExpected Prices

Local forward contracting opportunitiesLocal forward contracting opportunities Futures prices minus basisFutures prices minus basis Outlook informationOutlook information Past averagesPast averages Example:Example: CornCorn $3.75/bu$3.75/bu

SoybeansSoybeans $8.60/bu$8.60/bu

Expected Prices and CostsExpected Prices and CostsCorn Corn SoybeansSoybeans

SeedSeed $100$100 $57$57

Fertilizer + limeFertilizer + lime $119$119 $97$97

PesticidesPesticides $35$35 $30$30

Crop insuranceCrop insurance $20$20 $12$12

Interest + misc.Interest + misc. $24$24 $20$20

Fuel, repairsFuel, repairs $31$31 $21$21

Machinery own.Machinery own. $35$35 $26$26

Drying, storageDrying, storage $23$23 $0$0

Labor + mgmt.Labor + mgmt. $46$46 $39$39

TotalTotal $433$433 $302$302

Cash Rent Market ApproachAg Decision Maker website http://www.extension.iastate.edu/agdm/

Cash Rental Rates for Iowa 2010 Survey (file C2-10)

Calculating Cash Rent Values

1.Typical Cash Rent

Select the Area of the State/County

Area 6 County IowaDetermine Overall average $193

High Quality Third = $ 224Middle Quality Third = $ 195Low Quality Third = $ 161

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 $ 1.13Equals the Average Rent for Corn Acre $ 202

C. Expected Yield, Corn

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) 54Times rent per bushel of Soybean yield $3.76Equals the Average Rent for Soybean Acres $ 203

C. Expected Yield, Soybeans

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 $ 2.51Equals the Average Rent for all Row Crop Acres

$ 211

D. Corn Suitability Rating (CSR)

Source: ISU Extension Publication FM- 1851

Web Soil Survey – Home

http://websoilsurvey.nrcs.usda.gov/app/HomePage.htm

Leasing OpportunityLeasing 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

Cash Rent as % of Crop Value

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Average Iowa yields and Oct.-Dec. prices, excluding USDA direct payments.

SOYBEANS

CORN

A. Share of Gross IncomeCORN: (179 bu X $3.75) + $25 = $696SOYBEANS: (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 RateCORN: $ 696/ac x 30% = $ 209SOYBEANS: $ 489/ac x 40% = $ 196

B. Tenant Residual Method

CORN: $ 696 - $433 = $ 264

SOYBEAN: $ 489 - $302 = $ 187

Average: $ 225

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

Survey

Average Rents per bushel

Average Rents per CSR Index Point

Percent of gross crop value

Tenant’s residual

What is a fair rent?

Flexible Cash RentFlexible Cash Rent Limited risk for landlordLimited risk for landlord Landlord can participate in increased Landlord can participate in increased

prices and yieldsprices and yields Payment is in cash, do not need to Payment is in cash, do not need to

market cropsmarket crops Do not need to renegotiate each yearDo not need to renegotiate each year

Flexible Rent: Type 1Flexible Rent: Type 1 No base rent or base revenueNo base rent or base revenue Rent = Actual yield x actual price x 33%Rent = Actual yield x actual price x 33% No maximum or minimum rentNo maximum or minimum rent Example: Actual corn yield = 185 bu/acreExample: Actual corn yield = 185 bu/acre Closing corn bids at Williamsburg elevatorClosing corn bids at Williamsburg elevator

Oct. 1Oct. 1 $3.84$3.84 Nov. 1Nov. 1 $3.74$3.74 Dec. 1Dec. 1 $3.70$3.70 AverageAverage $3.76$3.76

Rent = 185 bu. x $3.76 x 33% = $230Rent = 185 bu. x $3.76 x 33% = $230

Flexible Rent: Type 2Flexible Rent: Type 2

Rent = Base rent + 50% of profitRent = Base rent + 50% of profit Base rent = $150Base rent = $150 Nonland costs of production = $302 (beans)Nonland costs of production = $302 (beans) Total cost including base rent = $462Total cost including base rent = $462 Actual gross = (60 bu. x $8.15) + $25 = $514Actual gross = (60 bu. x $8.15) + $25 = $514 ““Profit” = $514 - $462 = $52Profit” = $514 - $462 = $52 Rent = $150 + (50% x $52) = $176Rent = $150 + (50% x $52) = $176

Crop ShareCrop Share

Crop & Price risk are shared equallyCrop & Price risk are shared equallyA second USDA payment limitation is created A second USDA payment limitation is created Crop Share PercentagesCrop Share Percentages

50-5050-50 Tenant & LandlordTenant & Landlord67-3367-33 Tenant & LandlordTenant & Landlord

Possible self employment tax for landlordPossible self employment tax for landlord

Landlord Tenant

Land

½ inputs

Labor

½ inputs

Machinery

Management

½ income ½ income

Crop Share 50-50 Lease

Custom FarmingCustom Farming Very little financial risk for operatorVery little financial risk for operator Owner benefits from higher prices, Owner benefits from higher prices,

government programsgovernment programs Only one party markets grainOnly one party markets grain Agreements are simple and straight forwardAgreements are simple and straight forward Tax implications- self employmentTax implications- self employment Timing of operations can be troublesomeTiming of operations can be troublesome