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Farmland Values and Leasing Key Questions Chapter 20

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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?
Land Value Trends in Iowa
 1973-1981
    Increased export demand

    High grain prices

    Low interest rates

    High inflation rate
 1982-1986
   Higher interest rates

   Lower inflation

   Weather problems

   Forced sales

 Since 1986
   Farm economic recovery

   Government payments

   Higher yields

     Lower interest rates
Who Buys Iowa Farmland?
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.
Key Questions in Analyzing a
Land Purchase
 Does it fit in with the operation?
     Labor supply
     Machinery
     Livestock
     Location
 Is it worth the asking price?
     Will the potential income support it?
     How is it priced relative to the market?
        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%
Net Returns to Land Corn Soybeans     Average
Yield               165       52
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
 Capitalized Land Value
 Land value = $132 / .04 = $3,300 per acre
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
Comparative Sales
 Recent actual sales
 Similar land
 Same area
Comparative Sales
Factors to compare:
 Productivity     +
 Location         + or -
 Other uses/income + or -
 Family sales     -
 Sales contract   +
 Size of tract    + or -
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
  Adjust for % Tillable
 Example:
 75 acres tillable out of 80 = 93.75%
 $3,000 x 93.75% = $3,750 per acre
Financial Analysis of a Land
          Purchase
 Where can I obtain financing?
     Equity (savings)
     Credit
  Installment contract
 Will it cash flow?
     On its own?
     With help from other sources?
Cash Flow Analysis
 Sale price                  $3,600
 Down payment (1/3)           -1,200
 Loan amount(2/3)           = $2,400
 Amortization factor           x
  (7%, 25 yr loan) (p.418)    .0858
 Annual payment             = $206
 Income available             $120
 Surplus/deficit             (86)
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
Farmland Leasing in Iowa
                   Land
    Farmed by owner    46%
    Farmed by tenant   54%

            Types of Leases--acres
   Cash                     69%
   Crop Share               30%
   Other                     1%
    Own vs. Rent
        Ownership               Rental
   Security             Flexibility
   Inflation hedge      Lower cash cost
   Pride                No investment
   Build equity         Larger scale
   Loan collateral
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
   Estimating a Fair Rent
Tenant’s Residual (max. to pay)
= gross income - nonland costs

gross income        $378
nonland costs        222
residual            $156
Machinery fixed costs? Labor?
 Estimating a Fair Rent
% of gross income
(typically 35 to 40 %)

C: ($396 + $24) x 35% = $147

SB: ($312 + $24) x 40% = $134
 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
   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
    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.
          Crop Share Leases
 Tenant and owner divide crop
     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
Evaluating a Share Lease
     Corn       Total   Tenant   Owner
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%
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
        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
 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
        Contract Farming
 Usually involves growing specialty crops
       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
 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
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

				
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