farm leasing arrangements
DESCRIPTION
Farm Leasing Arrangements. Tim Eggers Field Agricultural Economist [email protected] 712-542-5171 www.extension.iastate.edu/feci. Agenda. Trends in Farmland Values Trends in Cash Rental Rates Determining a "Fair" Cash Rental Rate Property Tax Valuation. - PowerPoint PPT PresentationTRANSCRIPT
Farm Leasing Arrangements
Tim EggersField Agricultural Economist
712-542-5171
www.extension.iastate.edu/feci
Agenda
Trends in Farmland Values
Trends in Cash Rental Rates
Determining a "Fair" Cash Rental Rate
Property Tax Valuation
Rental Ethics – Our perceptions…• Tenants have the information (power)
• Cash rents tend to rise over time
• Manna-from-heaven payments often should be shared
• Foot-in-door high rents often inappropriate
• Landowners need money just like tenants
• Landowners are sometimes unethical too
• Family situations often are the worst
• Ethical behavior more profitable in long run
www.agmanager.info
Tenants have the power!• Landowners often:
– Are generations and geographically removed– Are technologically removed– Are old and easily taken advantage of– View the arrangement with a tenant as a long-term
commitment handed down from their parents– Think that farming is a low-income business and so want to “do
their part” in aiding it– Believe there are few potential tenants and so are beholden to
the existing tenant
• Tenants take advantage of the situation– Unintentionally (may be poor managers)– Intentionally (“she never asked me to raise rent”)
• Only occasionally do we see a landowner taking advantage of a tenant
www.agmanager.info
Cash rents rise over time• Although cash rents do fall about 30% of the years, on
average they rise 2-3% annually– Unusual to see a 3-year contract rate that shouldn’t
be higher than the previous contract
• Landowners & tenants who see stable crop-share terms for years think that translates to stable cash rent– We see cash rental rates that haven’t changed for
years and decades• Landlord: “We didn’t know.”• Tenant: “She never asked for a higher rent.”
www.agmanager.info
Cash rents fall 20% of the time in Iowa.On average they rise by 4%.
Foot-in-door high rental payments• High rent payments on new contracts often are followed
by stagnant rates for many years, which could be:– A) Tenant overbids to get land, then realizes he’s not
profitable so rationalizes stagnant rents– B) Tenant uses this as a strategy to acquire land and
pay lower-than-market rents over time• This is the least ethical outcome of the two
• Some tenants who do this actually beg for lower rents in near future, realizing that landlords are reluctant to change tenants– This is really unethical!
www.agmanager.info
Landowners need money too
• Tenants often make the argument that “she doesn’t need the money”– This is completely irrelevant!
• Admittedly, landowners sometimes foster this perception. . . which tends to change when investment-
minded heirs acquire land being rented
www.agmanager.info
www.agmanager.info
Landowner ethics• Landowners may use their land for non-ag purposes and
yet expect the same rent– Utility poles, oil leases– Lease hunting
• Landowners think if they paid too much for land it should bring a higher rent– This is completely irrelevant!
• Landowners might demand certain farming practices yet expect market rent– e.g., no fertilizer; conventional tillage
• Landowners make demands on current tenants to “fix” problems of past tenants
Family situations often are the worst
• “Sweat-equity” parent-child relationships lead to unrealistic expectations across generations
• Family members have trouble believing their own parents, children, or siblings would cheat them– Backlash then goes overboard
• Family members often are “always around” and so the pain always resurfaces– Hard to “forget and move on”
www.agmanager.info
Ethics is good long run economics• Poor ethics results in high tenant turnover:
– Increases cost of relationship establishment and monitoring
– Reduces profit to the land (tenant makes short run decisions)
• Bad business leads to unethical behavior– Poor management causes “I deserve more”– Bad behavior is rationalized
• Good ethics should emerge because it is the “right thing to do,” not for the purpose of long-run profit-maximization
www.agmanager.info
Iowa Farmland Value Surveys• Iowa State University Extension
– conducted annually around November 1st – mailed survey sent to 1,100 licensed real estate brokers– usually 500-600 responses– released in mid-December– http://www.extension.iastate.edu/agdm/wholefarm/html/c2-70.html
• Federal Reserve Bank of Chicago– quarterly survey of ag lenders by state– http://www.chicagofed.org/digital_assets/publications/agletter/
2010_2014/may_2011.pdf
• Realtors Land Institute – semi-annual survey (March and September)– compares land classification by corn production– includes pasture and timber land– http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-75.pdf
SouthwestSouthwest
$4,325$4,325up 21.5%up 21.5%up $766up $766
high $5,335high $5,335med $4,140med $4,140low $2,868low $2,868
AVERAGE VALUESAVERAGE VALUESall grades 1950−2010
POSITIVE FACTORSPOSITIVE FACTORSaffecting land values
NEGATIVE FACTORSNEGATIVE FACTORSaffecting land values
WHO PURCHASEDWHO PURCHASEDfarmland
Estimates of average dollar value per acre by crop reporting districts as of Nov. 1, 2010First line: high, medium, and low grade farmland valuesSecond line: district averagesThird line: average percent change since Nov. 1, 2009
sales activity from previous yearCHANGE INCHANGE IN
Iowa Farm & Land Chapter #2Realtors Land Institute March 2011
August 2011 USDA NASS
$196 average cash rent3.5% rent/value
Land Bubble or LandmineAugust USDA World Agricultural Supply and Demand estimated the US corn crop at 12.91 billion bushels
Feed and residual use 4.9 38%
Ethanol use 5.1 39%
Interest RatesImpacted by exchange rates
Farm ProfitabilityDemand for food, fiber and fuel
Prime Interest Rate
Farm Profitability
“Economic profits” don’t last long in acompetitive market
“Economic profits” destroyed by:– Falling output prices due to increases in production– Increased costs
Production costsLand prices/rentsNumber of producers
Farm Profitability• Can the world increase yields?
– Traditional breeding– GMO– Drought tolerant, Insect tolerant, Frost tolerant– Water utilization
• Can we put more land into production?– Africa– FSU– Arid regions
Land Quality Sites
http://ortho.gis.iastate.edu/
http://websoilsurvey.nrcs.usda.gov/
http://www.google.com/earth/
Calculating CSRs
Ortho.gis
Landlord Tenant
Land
½ inputs
Labor
½ inputs
Machinery
Management
½ income ½ income
Crop Share 50-50 Lease
Percent of Crop Share Acres with Equal Division of Costs
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Yield
Seed
Fertili
zer
Inse
cticid
e
Herbic
ideLim
e
Custo
m F
ertili
zer A
pplic
ation
Custo
m P
estic
ide A
pplic
ation
Custo
m C
ombin
ing
Pe
rce
nt
Putting a Lease Together
• Determine the goals for each party– production with the highest potential return– fair return to each party– continuity of income year to year– minimize risk– improve communication skills
• Put the agreement in writing - • Both parties should be accountable to
the lease arrangements established
Determining A “Fair” Cash Rent
Value
December 2012 Corn Futures
November 2012 Soybeans
Power Machinery Cost andInvestment Cost (Per Acre)
Direct Corn Expenses
Direct Bean Expenses
Fuel CostsAugust 9, 2011 Release
http://www.eia.doe.gov/emeu/steo/pub/contents.html
Price SummaryYear Percent Change
2009 2010 2011 2012 09-10 10-11 11-12WTI Crudea ($/barrel) 61.65 79.40 95.71 101 28.8 20.5 5.5Gasolineb ($/gal) 2.35 2.78 3.53 3.64 18.4 26.9 3.1Dieselc ($/gal) 2.46 2.99 3.83 3.96 21.5 28.0 3.4Natural Gasd ($/mcf) 12.12 11.18 11.22 11.93 -7.8 0.4 6.3a West Texas Intermediate. b Average regular pump price.c On-highway retail. d U.S. Residential average.
Page County Fair Cash Rent
Landlord Tenant
Land $301
½ inputs $185
Labor $ 31
½ inputs $185
Machinery $ 67
Management $ 60
½ income $472 ½ income $472
Profit $129
Crop Share 50-50 Lease Corn
Landlord Tenant
Land $225
½ inputs $91
Labor $ 27
½ inputs $ 91
Machinery $ 59
Management $ 60
½ income $314 ½ income $314
Profit $77
Crop Share 50-50 Lease Soybeans
Assumptions
Location: Page County
Tillable Acres: 140 Acres
Corn Yield: 151 bu/Acre
Soybean Yield: 48 bu/A
Corn Suitability Rating: 71 CSR
Cash Rent Market Approachc2-10 Cash Rental Rates for Iowa 2011 Survey
(released in June)
Methods for Determining Cash Rent Values c2-20 Computing a Cropland Cash Rental Rate
What Others are Charging/PayingAverage YieldsCorn Suitability Rating (CSR)
2011 Iowa Cash Rent Survey
224 220223
227 226219
213 177 198
What Others are Charging/Paying
District 7 County Page
Determine Overall average $210
High Quality Third $ 269
Middle Quality Third $ 197
Low Quality Third $ 164
Average Yields – Corn
Find the page with your Crop Reporting District and County
Average Rents per 5 Year Average Yield or CSR
Farm’s Average Corn Yield (bu/A) 151Times rent per bushel of Corn yield $ 1.39Equals the Average Rent for Corn Acre $ 210
Average Yields – SoybeansFind the page with your Crop Reporting District and County
Average Rents per 5 Year Average Yield or CSR
Farm’s Average Soybean Yield (bu/A) 48
Times rent per bushel of Soybean yield $4.40
Equals the Average Rent for Soybean Acres$ 211
Average YieldsAverage the two averages
Corn Average Rent $ 210
Soybean Average Rent $ 211
Average Rent Corn & Soybeans $ 211
Corn Suitability Ratings (CSR)Find the page with your Crop Reporting District and County
Average Rents per 5 Year Average Yield or CSR
Farm’s Average Corn Suitability Rating 71Times rent per CSR index point $ 2.95Equals the Average Rent for all Row Crop Acres
$ 209
Average of first three methods
What Others are Charging/Paying $ 210Average Yields $ 211Corn Suitability Ratings $ 209
Average $210 /A
$210/A X 140 Tillable Acres =$29,400
Split Payments of $14,700 and $14,700
Methods Requiring Additional Data
Share of Gross Crop Revenue
Return on Investment
Crop Share Equivalent
Tenant’s Residual
AssumptionsDecember 2012 Corn minus 50 cents $ 6.09
November 2012 Soybeans minus 80 cents $12.58
140 crop acres
151 bushel corn yield
48 bushel Soybean yield
$25 per acre in Direct Payments
2012 Estimated Costs of Crop Production
(2011 with additional information)
Share of Gross Crop Revenue
Corn (151 bu X $6.09) + $25 = $945
Soybeans (48 bu X $12.58) + $25 = $629
CORN: $ 945/ac x 24% = $ 227
SOYBEANS: $ 629/ac x 35% = $ 220
Average $ 223
Return on Investment
market value of $3,816 per acreExpected Rent: (3.4%) X $3,816/ acre
= $130 / acre
Crop Share Equivalent
50% of gross minus owner’s costs
Corn: $472 - $185 = $301
Soybeans: $314 - $91 = $225
Average $263
Tenant’s Residual
Corn: $ 945 - $527 = $ 417
Soybeans: $ 629 - $332 = $ 297
Average: $ 357
Summary of Methods
What Others are Charging/Paying $210
Average Yields $211
Corn Suitability Rating $209
Share of Gross Crop Revenue $223
Return on Investment $130
Crop Share Equivalent $263
Tenant’s Residual $357
Average $229
2012 Crop Costs Estimates - Corn following Soybeans
$782
$796
$869
160 bu.$4.51/bu
180 bu.$4.42/bu
200 bu.$4.35/bu
2012 Crop Cost Estimate - Soybeans
45 bu.$11.19/bu
50 bu.$10.97/bu
55 bu.$10.80/bu
$503 $548
$594
Flexible Cash LeasesDesire:
Terminated tenants want cash rent leases to be renewed by September 1 for the following year
Current Reality:
Prices and yields are very unpredictable
Solution:
Flexible lease contract
Advantages Disadvantages
Price and production risk shared as well as profit opportunities
Actual rent adjusts as production or price change
Owner does not have to be involved in decision making about inputs or marketing
Owner and producer share in risks
Not as well understood as traditional cash lease or crop share
More difficult to calculate
Owner benefits from tenant’s management skills
Tenant loses windfall profit potential from high prices
Types of Flexible Cash Leases
• Rent varies with both price and yield– Matches tenant’s ability to pay
• Rent varies with yield only– Could have high yields, low prices
• Rent varies with price, only– Could have low yields, high prices
Legal IssuesMowing Road Ditches – House File 2458
Prohibits mowing before July 15 in the rights-of-way and medians of interstate highways, state highways and secondary roads.
Applies to private property owners, the Iowa DOT, and counties.
Right to mow grass that is along the road on the landowner’s land, as long as the mowing is done on or after July 15 and does not conflict with an integrated roadside vegetation management plan.
Exceptions: mowing within 200 yards of your home, mowing for visibility and safety reasons, mowing around mailboxes, for other access purposes, and to establish control of damaging insects, noxious weeds or invasive plants.
Iowa Code Sec. 562.5AIn a farm tenancy, the tenant has the right to take part of a harvested crop’s above ground plant, such as corn stover and other crop residue.
Tenant may take aboveground residue at the time of harvest or after harvest, until the termination of tenancy.
It is important to remember that if the landlord and tenant specify another use or non use for the residue, in writing, then the writing will trump this new code section.
Property Tax Module
http://www.iowa.gov/tax/educate/78573.html
Page County Land Values
Source Value
November 1 2009 ISUE Annual Survey (2010 was $3,816) $3,195
2010 Capitalized Value (2011 is $1,950) $1,035
2010 Taxable Value (2011 will depend on 4% allowable growth) $686
Are you willing to sell for the capitalized or taxable value?
Source Per Acre Per 40 Per QuarterSection
November 1 2009 ISUE Annual Survey $3,195 $127,800 $511,200
2010 Capitalized Value $1,035 $41,400 $165,600
2010 Taxable Value $686 $27,440 $109,760
Assessed based on productivity
• Agricultural real estate is assessed at 100% of productivity and net earning capacity value.
• The assessor considers the productivity and net earning capacity of the property.
• Agricultural income as reflected by production, prices, expenses, and various local conditions is taken into account
Iowa Code 441.21 Actual, Assessed, and Taxable Value
e. The actual value of agricultural property shall be determined on the basis of productivity and net earning capacity of the property determined on the basis of its use for agricultural purposes capitalized at a rate of seven percent and applied uniformly among counties and among classes of property. Any formula or method employed to determine productivity and net earning capacity of property shall be adopted in full by rule.
41 Determination Steps
• Crop Acres• Crop Production• Crop Yields• Crop Prices• Landlord Income• Landlord Per Acre
Expense• Total Landlord Expense• Fertilizer and Insurance
Expense
• Total Expenses• Income for Enumerated
Acres• Net Income Per Acre for
Enumerated and Other Acres
• Total Net Landlord Income for Other Acres
• Total Net Income• Net Income Per Acre• Per Acre Real Estate Tax• Per Acre Value
6 Worksheets
• Budget Worksheet
• Production Worksheet
• Government Programs Worksheet
• Average Prices Worksheet
• Drainage and Levee Taxes Worksheet
• Real Estate Taxes Worksheet
40 Acre ParcelCapitalized Value $41,440
2009 Rollback * 0.6627143%
Taxable Value $27,443
Total Millage $27.2765 per $1,000
Total Property Tax $748.55
per acre $18.71
Page County Levies $/$1,000 40 acre example
General Basic $3.50 $96.05
General Supplemental $1.25038 $34.31
MH-DD Services $1.18722 $32.58
Rural Services Basic $2.63355 $72.27
Debt Service
Assessor $0.52213 $14.33
Agricultural Extension $0.25207 $ 6.92
State (Bruc & TB Erad) $0.0034 $ 0.09
Area College $0.8038 $22.06
Grant Township –
Shenandoah School District $16.80394 $461.15
Township $0.32001 $8.78
Hazards for 2012
• Interest rate increases• Price declines• Below break-even crop
insurance prices• Increasing input prices - energy
Other Resources• Materials from this meeting
– http://www.extension.iastate.edu/feci/Leasing/vflm.html
• Online Courses – Ag Management e-School– http://www.extension.iastate.edu/ames
• Workshops, meetings, conferences– http://dbs.extension.iastate.edu/calendar/
• Publications – rental survey, land value survey, etc.– http://www.extension.iastate.edu/pubs/
• Articles and spreadsheets– http://www.extension.iastate.edu/agdm/
• Private Consultation– http://www.extension.iastate.edu/ag/fsfm/fsfarmmg.html
Objective: Land Leasing Confidence
Introduction to Farm Leases
Cash Rent Leases
Crop Share Leases
Custom Farming
Renting Buildings
Renting Hay and Pasture Land
Legal and Tax Considerations
Conservation and Environmental Considerations
USDA Agencies and Programs
Owner and Operator Relations
Farm Leasing Arrangements
Photo courtesy of USDA NRCS
www.extension.iastate.edu/ames
Objective: Purchase Plan
Land Value Trends
Using Soils Information
Appraisal Techniques
Financing Considerations
Feasibility of a Land Purchase
Farmland Ownership
Photo courtesy of USDA NRCS
www.extension.iastate.edu/ames
ISU Extension builds
partnerships and provides
research-based learning
opportunities to improve
quality of life in Iowa
Our Mission
We believe in . . .
• Quality
• Access
• Diversity
• Accountability