Farmland Values Rental Rates in Northwest Kansas by uuo18330

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									Farmland Values & Rental
Rates in Northwest Kansas

   Daniel O’Brien
   Extension Agricultural Economist
   K-State Research and Extension


            K-State Research and Extension
We will discuss….
I.        How to Estimate the Current Market
          Value of Farmland

II.       Farmland Prices & Rental Rates
      §    Northwest Kansas (1976-2006)
      §    West Central Kansas (1976-2006)
      §    Southwest Nebraska (1978-2007)

III. An Example Analysis of Current Land
     Purchase Prices (KSU-Landbuy.xls)
Q. How to Estimate Farmland’s
Present Market Value?
n   Current FARMLAND Value =
    The Present Value of Expected Future
     After-Tax Net Income from….
    + Agricultural Use (Farming or Renting)
    + Non-Agricultural Use Revenues/Fees
    + Capital Gains from Future Land Sale
A. Expected Farm Profits
n   Net Farming Returns or “Rent”
    q   Crop & Livestock Production
        n   Weather, Yields, Pasture Conditions
        n   Legal Water Rights & Water Availability
    q   Farm Markets & Prices
        n   Bioenergy Demand, Feed Use, Grain Exports
        n   Cattle Cycles, Red Meat Demand, Beef Exports
    q   Production Costs
        n   Inflation in cost to offset farm revenues
    q   Farm Size Economies – Incentives to Expand
A. Expected Farm Profits (more)
n   USDA Farm Programs
    q   Farm Program “Base Acreage” & “Proven
        Crop Yields”
        n   Critical in determination of level of farm income
            support from USDA Farm Programs

    q   Conservation Program Status?
        n   Q. Are any limitations placed on the cropping system on
            this land by USDA Conservation Plans?
        n   Q. Enrolled in CRP (Conservation Reserve Program)?
            q   If so, what are terms of CRP Contract? $/acre, years, etc.
B. Non-Ag Market Factors
n   Urban Development or “Sprawl”
    q   “Parceling” or subdividing of farmland tracts
        for construction of country / rural homes, etc.
        n   Zoning – Ag Land Use Issues

n   Recreational Uses / Non-Ag Demand
    q   Hunting Access-Leases &/or Agri-Tourism

n   Outside Investors
    q   Diversifying their portfolio of Financial Assets
        n   Tax Management issues
C. Financial & Tax Issues
n   Purchase Price of Farmland
n   Interest Rates & Terms of Loans
    q   Loan Equity Requirements – % Cash Upfront

n   Expected Growth in Farmland Values &
    Net Farm Income/Rent over time
n   Tax Issues
    q   Taxes on Farm Income/Rent & Capital Gains
    q   IRS Section 1031 Tax Exchanges
Historic Land Price Growth %’s
(Kastens & Dhuyvetter – 2006)

n   Long Term: 3.9% Average Annual Growth
    in Kansas Land Prices (1880-2005 = 126 years)
    ≈ 2.4% Inflation Rate / yr
    ≈ 1.6% Real Land Value Growth / yr

n   Since 1951: 5.0% Average Annual Growth
    in Kansas Land Prices (1951-2005 = 55 years)
    ≈ 3.5% Inflation Rate / yr
    ≈ 1.4% Real Land Value Growth /yr
Expected Growth Rates For
Kansas Farmland (Kastens-Dhuyvetter 2006)
n   TOTAL Annual Growth in Kansas
    Farmland Prices: 3% to 5% annually

n   AGRICULTURAL Income-Based Growth
    in Kansas Farmland Prices:
    q   Non-irrigated Cropland:   2.4% annually
    q   Pastureland:              2.1% annually
    q   Irrigated Cropland:       ?? % annually
II. Farmland Prices & Cash
Rental Rates
By Region:
Northwest & West Central Kansas
Southwest Nebraska

By Land Use:
Non-Irrigated & Irrigated Cropland
Pastureland
Non-Irrigated Farmland Prices
NW, WC Kansas (1976-2006), SW Nebraska (1978-2007)

$800
                                                                    $640
$700
$600
$500
$400
                                                                    $559
$300
$200
$100
 $0
       '76   '79   '82   '85    '88   '91   '94   '97   '00   '03     '06

       Northwest KS            West Central KS          Southwest NE
Non-Irrigated Farmland $ Trends
Northwest Kansas (1976-2006)
$750
                                                                   $640
$650

$550

$450

$350

$250
       '76   '79   '82   '85   '88   '91   '94   '97   '00   '03   '06

             NW KS Dryland $
             NW KS: +3.7% or $5/acre per year ('76-'06)
             NW KS: 3 Yr Moving Ave.
             NW KS: 7 Yr Moving Ave.
Non-Irrigated Farmland $ Trends
Southwest Nebraska (1978-2007)
$650
                                                               $559
$550

$450

$350

$250
       '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06
              SW NE Dryland $
              SW NE: +1.8% or $3/acre per year ('78-'07)
              NW KS: 3 Yr Moving Ave.
              NW KS: 7 Yr Moving Ave.
Irrigated Farmland Prices
NW, WC Kansas (1976-2006), SW Nebraska (1978-2007)
$2,000
                                                                           $1,575
$1,750
$1,500
$1,250
$1,000
 $750
                                                                      $1,235
 $500
 $250
   $0
         '76     '79   '82    '85    '88   '91   '94   '97     '00   '03     '06

               Northwest KS         West Central KS          Southwest NE
Irrigated Farmland $ Trends
Northwest Kansas (1976-2006)
$1,400
                                                                                               $1,235
$1,200

$1,000

 $800

 $600

 $400
         '76   '78   '80   '82   '84   '86   '88   '90   '92   '94   '96   '98   '00   '02   '04   '06

                     NW KS Irrigated $
                     NW KS: +3.5% or $16/acre per year ('76-'06)
                     NW KS: 3 Yr Moving Ave.
                     NW KS: 7 Yr Moving Ave.
Irrigated Farmland $ Trends
Southwest Nebraska (1978-2007)
$1,800
                                                               $1,575
$1,600
$1,400
$1,200
$1,000
  $800
 $600
 $400
         '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06
               SW NE CP Irrigated $
               SW NE: +3.5% or $16/acre per year ('78-'07)
               SW NE: 3 Yr Moving Ave.
               SW NE: 7 Yr Moving Ave.
Pastureland Prices
NW, WC Kansas (1976-2006), SW Nebraska (1978-2007)
$450
$400
                                                                     $330
$350
$300
$250
$200
$150
                                                                       $313
$100
 $50
 $0
       '76    '79   '82   '85    '88   '91   '94   '97   '00   '03     '06

             Northwest KS       West Central KS      Southwest NE
Pastureland $ Trends
Northwest Kansas (1976-2006)
$400
                                                                                  $330
$350
$300
$250
$200
$150
$100
       '76 '78    '80 '82   '84   '86 '88   '90   '92 '94 '96   '98 '00   '02   '04   '06

                 NW KS Pastureland $
                 NW KS: +3.5% or $0.82/acre per year ('76-'06)
                 NW KS: 3 Yr Moving Ave.
                 NW KS: 7 Yr Moving Ave.
Pastureland $ Trends
Southwest Nebraska (1978-2007)
$400
                                                              $313
$350
$300
$250
$200
$150
$100
 $50
       '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06

              SW NE Pastureland $
              SW NE: +5.4% or $4/acre per year ('78-'07)
              SW NE: 3 Yr Moving Ave.
              SW NE: 7 Yr Moving Ave.
Non-Irrigated Farmland Cash Rent
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)

$45
$40                                                                 $34
$35
$30
$25
                                                                     $34
$20
$15
$10
 $5
 $0
      '76   '79   '82   '85    '88   '91   '94   '97    '00   '03    '06

      Northwest KS            West Central KS          Southwest NE
Non-Irrigated Rent-to-Value
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)

9.0%

8.0%

7.0%

6.0%

5.0%

4.0%

3.0%
       '76   '79   '82   '85     '88   '91   '94   '97    '00   '03   '06

       Northwest KS            West Central KS           Southwest NE
Irrigated Farmland Cash Rent
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)

$140
                                                                 $128
$120
$100
                                                                     $74
 $80
 $60
 $40
 $20

 $0
       '76   '79   '82   '85    '88   '91   '94   '97    '00   '03   '06

       Northwest KS            West Central KS          Southwest NE
Irrigated Cropland Rent-to-Value
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)
         At Issue: Investment-Upkeep of Irrigation System + Cropland
14.0%

12.0%

10.0%

 8.0%

 6.0%

 4.0%
        '76   '79   '82   '85     '88   '91   '94   '97    '00   '03   '06

    Northwest KS                West Central KS           Southwest NE
Pastureland Cash Rents
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)

$15
                                                                  $12.00
$12

 $9
                                                                  $9.60
 $6

 $3

 $0
      '76   '79   '82   '85   '88   '91   '94   '97   '00   '03     '06

       Northwest KS           West Central KS         Southwest NE
Pastureland Rent-to-Value
NW, WC Kansas (1976-2006), SW Nebraska (1981-2007)

10.0%
 9.0%
 8.0%
 7.0%
 6.0%
 5.0%
 4.0%
 3.0%
 2.0%
 1.0%
        '76   '79   '82   '85     '88   '91   '94   '97    '00   '03   '06
    Northwest KS                West Central KS           Southwest NE
III. An Example Analysis of
Current Land Purchase Prices
Three (3) Scenarios (each 160 acres):
1. Center Pivot Irrigated Cropland
2. Non-Irrigated Cropland
3. Pastureland
Source: KSU-Landbuy.xls
(Kastens & Dhuyvetter, K-State Research & Extension, 2006)
Example: NW KS Irrigated Cropland
n   Cropland Acreage:
    q   125 acres Irrigated – Center Pivot
    q   30 acres Dryland – Corners
    q   5 acres Waste, Roads, Margins, etc.
    q   Total: 160 acres

n   Market / Purchase Price:
    q   Irrigated Cropland:       $1,500 /acre
    q   Non-Irrigated Cropland:   $ 640 /acre
    q   Price for All Acres:      $1,312 /acre
Example: Irrigated Cropland (more)
n   Cash Rent:
    q   Irrigated Cropland:              $120 /acre
    q   Non-Irrigated Cropland:          $ 34 /acre
    q   Cash Rent for All Acres:         $101 /acre
n   Non-Ag Rent Income:                    $0 /acre
n   No. Years Land to be Owned:            30 years
n   Tax Rates:
    q   Income Tax Rate:           35%
    q   Capital Gains Tax Rate:    15%
Ex: Irrigated Cropland (still more)
n   Financial / Lending Requirements:
    q   Interest Rate:                8%
    q   % Purchase price financed:   90%
n   Ag-Related Land$ & Rent Growth: 2.4%/yr
n   Total Land Price & Cash Rent Growth Rate
    (Ag + Non-Ag Related):
    q   Scenario #1: 3.0%
    q   Scenario #2: 4.0%
    q   Scenario #3: 5.0%
Results: NW KS Irrigated Cropland
n   Original Market / Purchase Price:
    q   Irrigated Cropland:       $1,500 /acre
    q   Non-Irrigated Cropland:   $ 640 /acre
    q   Price for All Acres:      $1,312 /acre

n   Present Value of Purchase (+/- Purchase $)
    q   @ 3.0% Growth ð PV = $1,893 /ac (+$ 581 /ac)
    q   @ 4.0% Growth ð PV = $2,092 /ac (+$ 780 /ac)
    q   @ 5.0% Growth ð PV = $2,355 /ac (+$1043 /ac)
Ex. 2: Northwest Kansas Dryland
n   Cropland Acreage:
    q   155 acres Non-irrigated Cropland + 5 ac Other

n   Market / Purchase Price:           $640 /acre
n   Cash Rent:                         $ 34 /acre
n   Non-Ag Rent Income:                $    0 /acre
n   No. Years Land to be Owned:            30 years
n   All Other assumptions the same
Ex. 2 Results: NW Kansas Dryland
n   Original Market / Purchase Price:
    q   Non-Irrigated Cropland:   $640 /acre

n   Present Value of Purchase (+/- Purchase $)
    q   @ 3.0% Growth ð PV = $721 /ac (+$ 81 /ac)
    q   @ 4.0% Growth ð PV = $818 /ac (+$178 /ac)
    q   @ 5.0% Growth ð PV = $946 /ac (+$306 /ac)
Ex. 3: Northwest Kansas Pasture
n   Pastureland Acreage:
    q   155 acres Pastureland + 5 ac Other

n   Market / Purchase Price:           $330 /acre
n   Cash Rent:                         $9.60 /acre
n   Ag-Related Land$ & Rent Growth: 2.1%/yr
n   Non-Ag Rent Income:                $      0 /acre
n   No. Years Land to be Owned:              30 years
n   All Other assumptions the same
Ex. 3 Results: NW Kansas Pasture
n   Original Market / Purchase Price:
    q   Non-Irrigated Cropland:   $330 /acre

n   Present Value of Purchase (+/- Purchase $)
    q   @ 3.0% Growth ð PV = $268 /ac (-$62 /ac)
    q   @ 4.0% Growth ð PV = $318 /ac (-$12 /ac)
    q   @ 5.0% Growth ð PV = $384 /ac (+$54 /ac)

n   Results likely to be more positive IF add in
    additional Non-Ag Income (Recreation, etc.)
Comments or Questions?

n   Email: dobrien@ksu.edu

n   KSU Ag Economics Website:
    http://www.agmanager.info

n   Northwest Research Extension Center
    Website:
    http://www.oznet.ksu.edu/nwao/

								
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