Farm Leasing Arrangements
Tim Eggers
Field Agricultural Economist
teggers@iastate.edu
712-542-5171
www.extension.iastate.edu/feci
Top Issues
•
•
•
•
•
•
•
•
Land Values
Cash Rental Rates
Custom Rates
Leasing Practices
Crop-Share Leases
Calculating a Cash Rent Lease
Flexible Cash Leases
Bio-economy
Tools
• ISU Extension Staff Resources
• Ag Decision Maker
– Decision Aids
• Annual Surveys
• Publications
– Decision Tools
• Agricultural Management e-School
– Farm Leasing Arrangements course
• Non ISUE resources
December 2007 Corn Futures
November 2007 Soybean Futures
December 2008 Corn Futures
November 2008 Soybean Futures
What Should the Cash Rent Be?
$9.80
$350
$8.80
$300
$7.80
November Soybeans
Tenant’s Residual
$250
$6.80
$5.80
$200
Crop Share
$4.80
Share of Gross
$150
2007 Futures
2008 Futures December Corn
$3.80
$2.80
$100
Aug
Sept
Oct
Shar e of Gr oss
Nov
Dec
T enant 's Resi dual
Jan
Feb
Cr op Shar e E qui val ent
M ar
Apr
M ay
December Cor n
June
July
November B eans
When did you run the numbers?
Share o f Gro ss
Tenant's Residual
Cro p Share Equivalent
$300
$250
$200
$150
2007 Futures
2008 Futures
$100
Aug
Sept
Oct
Nov
Dec
Jan
Feb
M ar
Apr
M ay
June
July
With these prices?
$8.80
$7.80
$6.80
December Co rn
No vember B eans
$5.80
2007 Futures
$4.80
2008 Futures
$3.80
$2.80
Aug
Sept
Oct
Nov
Dec
Jan
Feb
M ar
Apr
M ay
June
July
Northeast
Northwest
Ethanol Plants
low
high
Ethanol Plants
average
Elevators
low
high
average
Elevators
Oct 06
2.53
2.75
2.64
2.55
2.59
2.76
2.67
2.64
Nov 06
3.21
3.35
3.28
3.18
3.19
3.36
3.28
3.22
Dec 06
3.39
3.52
3.45
3.31
3.34
3.46
3.40
3.34
Jan 07
3.46
3.61
3.54
3.44
3.49
3.60
3.55
3.53
Feb 07
3.76
3.93
3.85
3.76
3.75
3.90
3.82
3.78
Mar 07
3.80
3.84
3.82
3.62
3.66
3.83
3.75
3.68
Apr 07
3.23
3.45
3.34
3.24
3.20
3.44
3.32
3.33
May 07
3.35
3.59
3.47
3.40
3.27
3.55
3.41
3.47
Jun 07
3.53
3.73
3.63
3.47
3.59
3.84
3.71
3.66
Corn Price Difference, Average Ethanol Bids Minus Elevator Bids,
Northeast and Northwest Iowa
$0.25
$0.20
$0.15
$0.10
$0.05
$$(0.05)
Northeast Iowa
Northwest Iowa
$(0.10)
Oct 06 Nov
06
Dec Jan 07 Feb
06
07
Mar Apr 07 May
07
07
Jun
07
www.extension.iastate.edu/agdm
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
• Federal Reserve Bank of Chicago
– quarterly survey of ag lenders by state
– http://www.chicagofed.org/economic_research_and_data/ag_letter.cfm
• Realtors Land Institute
– semi-annual survey (March and September)
– compares land classification by corn production
– includes pasture and timber land
– http://www.centralstatesland.com/csmlsdisplay.asp?id=ed01
Distribution of Iowa Farmland by Age of Owner and Year
25%
20%
15%
10%
5%
0%
< 25
25-34
35-44
1982
45-54
1992
55-64
2002
65-74
> 75
Positive Factors Affecting
Land Values, 2003-2006
Recent Land Value Estimates
• Chicago Fed
– 7% increase in the 1st quarter
– 16% increase April to April
• Iowa Chapter of Realtors Land Institute
– 13.6% increase from September 06 to March 07
• ISU Soil Management Conference
– forecast a 20% increase from November 07 to
November 08
Prior to September 15, 2006
• Record increases in land value for each
of the prior three years
• Drivers
– poor overall economy
– low interest rates
– attractiveness of land investment
• Investors have been a major factor
Post September 15, 2006
• Bioeconomy boom
• Newfound support for fourth year of record
increases
• Existing farmers are becoming more active
participants
• Land at 173% 2000 value
Factors to Watch
• Overall performance of the economy
– interest rates
– housing market
• Recreational demand
• Aging farmland owners and their heirs
• Bioeconomy
– corn based ethanol
• Farm Program
– more of the same/cuts/regional differences
Audubon
Guthrie
Leasing Practices
Crop Reporting District 7
Percent
of Crop Acres
Pottawattamie
Cass
Adair
Owner operated
47%
Custom farmed
3%
Cash Rent
18%
Crop Share
30%
Other Lease
2%
Total:Mills
100% Adams
Montgomery
Percent of:
Leased Acres
Leases
Written lease
35%
38%
Leased to relative
40%
22%
Farm resident owner
35%
38%
Fremont
Taylor
Professional
ManagerPage
5%
4%
Length of tenure (yrs.)
12
P
O
C
C
C
O
T
Union
W
L
F
Ringgold
P
L
Cash/Crop Share/Owner Operator
60%
50%
40%
30%
20%
10%
0%
1982
1992
Owner Operated
1997
Cash Rent
2002
Crop Share
Southwest
Other
Crop Share Practices
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
Crop Share 50-50 Lease
Landlord
Tenant
Land
$212
Labor
$ 27
½ inputs
$114
½ inputs
$114
Machinery
$ 63
Management
$123
½ income $327
½ income $327
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
$ per acre
Net Returns to Owner--Corn/Soybeans Rotation
160
140
120
100
Crop-share
80
Cash
60
Net Returns to Tenant--Corn/Soybeans Rotation
Crop-share
Cash
110
70
50
30
10
(10)
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
$ per acre
90
(30)
Leasing Opportunity
Soil Type: Acres: Percent:
---------- -------- -------T370B
61.47 23.2%
248
17.72 6.7%
T368
16.70 6.3%
212
11.71 4.4%
T369
87.78 33.1%
133
9.69
3.7%
220
60.11 22.7%
---------- --------------Totals
265.19 100.0%
CSR
----85
60
90
91
85
80
85
----83.73
Iowa Corn Suitability Rating
based yield estimation:
179 bushels per acre
Determining A “Fair”
Cash Rent
Value
Supporting Information
Location:
Tillable Acres:
Corn Yield:
Soybean Yield:
Corn Suitability Rating:
Page County
265 Acres
179 bu/Acre
49 bu/A
84 CSR
Calculating Cash Rent Values
Cash Rent Market Approach
ISU Extension Publication FM 1851 – Cash Rental
Rates for Iowa 2007 Survey (released in May)
Three Methods for Determining Cash Rent Values
Typical Cash Rent
Average Rent for Production
Average Rent for Corn Suitability Rating (CSR)
Calculating Cash Rent
1.Typical Cash Rent
Select the Area of the State/County
Area
10
County Page
Determine Overall average $ 132
High Quality Third =
$ 161
Middle Quality Third = $ 130
Low Quality Third =
$ 104
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)
Times rent per bushel of Corn yield
Equals the Average Rent for Corn Acre
179
$ .96
$ 172
Calculating Cash Rent
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)
49
Times rent per bushel of Soybean yield
$ 3.08
Equals the Average Rent for Soybean Acres $151
Calculating Cash Rent
2. Average Rents Per Unit – Corn & Soybeans
Add the Average Rent for Both
Corn Average Rent
Soybean Average Rent
$ 172
$ 151
Average Rent Corn & Soybeans $ 161
Using Corn Suitability Rating (CSR)
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
84
Times rent per CSR index point
$ 1.76
Equals the Average Rent for all Row Crop Acres
$
148
Source: ISU Extension Publication FM- 1851
Overall Average
Average all 3 Methods
Method 1: Typical Cash Rent
$ 161
Method 2: Average Rents per Unit
$ 161
Method 3: Average Rents per CSR Index Point $ 148
Total all Methods and divide by 3
$157 /A X 265 Tillable Acres =
$157 /A
$41,517
Split Payments of $20,758 and $20,758
Source: ISU Extension Publication FM- 1851
Cash Lease Calculations
Gross Income Method
Tenant Residual Method
Crop Share Method
Return on Investment Method
Assumptions
•
•
•
•
265 crop acres
179 bushel corn yield
49 bushel Soybean yield
Corn Market Price $3.50 / bu
– December 2008 minus 50 cents
• Soybean Market Price $8.70 / bu
– November 2008 minus 50 cents
• Direct Government Payments average $22.00 / acre
Share of Gross Income
CORN:
(179 bu X $3.50) + $22 = $648.50
SOYBEANS: (49 bu X $8.70) + $22 = $448.30
Iowa cash rents typically are equal to about 30 to 40 percent of the gross
income from producing corn, and 35 to 45 percent of the gross income
from producing soybeans.
Cash Rental Rate
CORN:
$648.50/ac X 35% = $ 227
SOYBEANS:
$448.30/ac x 40% = $ 179
Average
$ 203
Tenant Residual Method
CORN:
$648.50 – $368.47 = $280.03
SOYBEAN:
$448.30 - $194.70 = $253.60
Average:
30% lower prices or lower yield
20% lower prices or lower yield
10% higher prices or lower yield
$266.79
$109
$162
$319
Crop Share Method 50-50 Share
Income:
Corn: 50 % x 648.50 = $324.25
Soybeans: 50 % x $448.30 = $224.15
Expense:
Corn: 50 % x $237.28 = $118.64
Soybeans: 50 % x $161.49 = $62.66
Equivalent Rent:
Corn:
$324.25 - $118.64 = $205.61
Soybean:
$224.15 - $62.66 = $161.49
Average:
$183.51
(1) The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime,
pesticides, crop insurance, interest and miscellaneous, and drying and storage.
Return on Investment Method
Iowa farm estimated to have a market value of $3,700 per acre.
Expected Rent: (5%) X $3,700 / acre = $185 / acre
5.66%
Corn
Soybeans
Cash Rent Survey
Per Bushel Yield
Per CSR Point
Gross Income
Tenant Residual
Crop Share
Return on Investment
$161
$172
$148
$229
$280
$206
$185
$161
$151
$148
$169
$254
$161
$185
Average
$197
$176
All Average:
$186
2006 Average:
$130
43% increase
Machinery costs
Fixed costs
Variable costs
Depreciation
Repairs
Interest
Labor
Storage
Fuel
Insurance
IFBA 2005 Machinery Costs
FM 1789
Low Third
$71
Mid Third
$76
High Third
$90
Iowa Farm Costs and Returns (updated in September)
Power Mach Cost vs Invest. Cost
(Per Acre)
300
250
200
150
100
50
0
1996
1997
1998
1999
Mach & Power Cost
2000
2001
2002
2003
2004
2005
Mach & Power Investment
2006
Direct Corn Expenses
80
70
60
50
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Seed
Fertilizer & Lime
Insecticide
Drying & Storage
Herbicide
Direct Bean Expenses
35
30
25
20
15
10
5
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Seed
Fertilizer & Lime
Insecticide
Drying & Storage
Herbicide
Flexible Cash Leases
Desire:
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
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
Disadvantages
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
Flexible Cash Lease is a Share Lease
• Farm Service Agency says that if the
actual rent depends on the farm yield,
direct and counter cyclical payments
must be shared with the landowner.
• Considered to be a “share” lease
• Does not apply to LDPs or marketing
loan gains.
Flexible Cash Lease is a Cash Lease
• If the final rent does not depend on the
farm yield, a flexible rent is still
considered to be a cash rent.
• Example: base rent on county average
yield and actual price at harvest.
• County yields are not published until
March each year.
Base plus Bonus
• Paying a “flex bonus” when revenue is
above expectations does not affect the
split of payments if it is not based on the
actual farm yield.
• Provide a copy of your agreement to the
FSA county office.
71
Plants
66Potential
Planned +Iowa
current
in Iowa
63
11Just
Just across
across the
borders
11
IA Borders
*
*
*
*
*
* HowardWinnesh
Osceola
* DickensonEmmet
* Mitchell
* WinnebagoWorth
Allamakee
iek
*
O’Brien Clay Palo
* Kosuth Hancoc * Floyd
Sioux*
* * *Chickasaw Fayette
C
erroG
ordo
Alto
*
k
Clayton
Humbol
Cherokee
* BuenaV*ista Pocahontas dt* *Wright Franklin Butler Bremer
Plymouth
*
*
*
*
BlackHawk Buchana Delawa
*a *Sac Calhoun Webster
* Hamilton
Woodbury Id
*
re
** Grundy
Hardin
n
*
*
Lyon
Tama
*
Monona Crawford Carroll Greene
*
*
*
*
Shelby Audubon Guthrie
*Pottawattamie
Mills
*
Fremont
Figure 1.
Boone
*
Harrison
*
*
Montgomery
*Page
Adair
Cass
*
Adams
*
Story
r
*
Dalla Polk
s
Madis
on
*
Union
Marshal
l
Jasper
Benton
n
Jackson
Jones
* ** **
*
Poweshiek
Johnson
Cedar
Iowa
*
Mucatine
*
Warren Marion
Mahask Keokuk
a
Clarke
Linn
Dubuque
Lucas Monroe
Taylor Ringgold Decatur Wayne
Appanoose
*Wapello
Davis
*
Scott *
Clinton
n
Washington
Jefferson
Louisa
Henry
*
DesMoines
VanBuren Lee
Capacity: 142%
129% of
Capacity:
of 2006
2006crop
Crop
*
corn
processing
&
plants,
current
&&planned,
06
Iowa
processing
& ethanol
ethanol
plants,
current
planned,
10/26/06
Iowa
Corn
Processing
Plants,
Current
& Actual
Planned,
5/30/07
Iowa
Corn
Processing
& Ethanol
Plant
Locations,
Locations,
Actual
&
& Planned
Planned.
, 11/20/
. 9/26/06
Total 11,693 mil. Bu.
Hazards for 2008
• Lower crop insurance prices
• Higher input costs
– rent, fuel, fertilizer, seed, machinery, and drying
• Yields
– low or at insurance coverage levels
• Price
– average or below break even
• Increased world supplies or low ethanol
prices
Other Resources
•
Materials from this meeting
–
•
Online Courses – Ag Management e-School
–
•
http://www.extension.iastate.edu/pubs/
Articles and spreadsheets
–
•
http://dbs.extension.iastate.edu/calendar/
Publications – rental survey, land value survey, etc.
–
•
http://www.extension.iastate.edu/ames
Workshops, meetings, conferences
–
•
http://www.extension.iastate.edu/feci/Leasing/vflm.html
http://www.extension.iastate.edu/agdm/
Private Consultation
–
http://www.extension.iastate.edu/ag/fsfm/fsfarmmg.html
Farm Lease Arrangements
Land Leasing Confidence
A.M.E.S.
Agricultural
Management
e-school
An ISU
Extension
Outreach
Institute
•
•
•
•
•
•
•
•
•
•
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
Farmland Ownership
Purchase Plan
A.M.E.S.
Agricultural
Management
e-school
An ISU
Extension
Outreach
Institute
•
•
•
•
•
Land Value Trends
Using Soils Information
Appraisal Techniques
Financing Considerations
Feasibility of a Land Purchase
Thank You!
Tim Eggers
Field Ag Economist
ISU Page County Extension
311 East Washington
Clarinda, Iowa 51632
(712) 542-5171
teggers@iastate.edu
www.extension.iastate.edu/feci
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