

• The Economics of Land Use and
Management
• Controlling Land 
Own or Lease?
• Buying Land
• Leasing Land
• Conservation and Environmental
Concerns farm management chapter 20
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1.
To explore the unique characteristics of land and its use in agriculture
2.
To compare the advantages and disadvantages of owning and renting land
3.
To explain important factors in land purchase decisions, methods of land valuation, and the legal aspects of a land purchase
4.
To compare the characteristics of different leasing arrangements
5.
To demonstrate how an equitable share leasing arrangement can be developed
6.
To discuss profitable land management systems that conserve resources and sustain the environment farm management chapter 20
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Figure 20-1
Farmland values in the United States farm management chapter 20
(excludes Alaska and Hawaii)
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Land is a permanent resource that doesn’t depreciate or wear out. Land is immobile and cannot be moved.
Because the supply of land is essentially fixed, land prices are very sensitive to changes in demand for its products.
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Figure 20-2
Average value of farmland per acre, by region farm management chapter 20
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
How much land to control and how to acquire it are two of the most important decisions to be made by any farmer or rancher. Land acquisition should be thought of in terms of control.
Control can be achieved by ownership or by leasing. Nearly half of U.S. farmland is leased.
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1. Security of tenure
2. Loan collateral
3. Management independence and freedom
4. Hedge against inflation
5. Pride of ownership farm management chapter 20
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1. Cash flow
2. Lower return on capital
3. Less working capital
4. Size limits farm management chapter 20
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1. More working capital
2. Additional management
3. More flexible size
4. More flexible financial obligations farm management chapter 20
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1. Uncertainty
2. Poor facilities
3. Slow equity accumulation farm management chapter 20
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Value is determined by:
1. Soil, topography, and climate
2. Buildings and improvements
3. Size
4. Markets
5. Community
6. Location
7. Competing uses
8. Agricultural program characteristics farm management chapter 20
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The estimated land value, V, is:
V =
R d where R is the annual net income and d is the discount rate.
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Prices of comparable sales are adjusted for differences in factors contributing directly to value as discussed earlier. It is also important o consider:
1. Financing arrangements
2. Relationships of buyer and seller
3. Time of sale farm management chapter 20
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Table 20-1
Estimated Annual Income and Expenses for Appraisal Purposes
Income Acres Yield (bu) Price Total
Corn
Soybeans
Total Income
Expenses
100
50
135
40
$2.50
6.70
$33,750
13,400
47,150
6,500
3,350
4,500
500
1,300
4,500
Fertilizer
Seed
Pesticides
Trucking
Drying
Labor and management
Machinery
Ownership costs
Operating costs
Property taxes and insurance
Repairs and maintenance
Depreciation of buildings, fences
Total expenses
Annual net income
Capitalization of income:
Capitalization rate
8% ($13,900/0.08) =
6% ($13,900/0.06) =
4% ($13,900/0.04) =
Total value
$173,750
$231,667
$347,500
5,500
3,000
2,800
500
800
$33,250
$13,900 per acre
$1,086
$1,448
$2,172 farm management hypothetical 160 acre tract with 150 tillable acres chapter 20
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Table 20-2
Cash Flow Analysis of the Purchase of a 160-Acre Tract at $1,600 per Acre
Year 1 Year 2 Year 3 Year 4 Year 5
Cash receipts ($)
Cash Expenditures
Seed, fertilizer, pesticides,
trucking, drying
Machinery
Family living
Taxes, repairs
Annual loan payments ($)
Principal
Interest
Total cash outflow ($)
Net cash flow ($)
47,150
16,150
5,750
4,000
3,300
8,320
13,312
50,832
-3,682
48,565
16,635
5,923
4,120
3,399
8,320
12,646
51,043
-2,478
50,021
17,134
6,100
4,244
3,501
8,320
11,981
51,280
-1,259
51,522
17,648
6,283
4,371
3,606
8,320
Assumes a down payment of $89,600 with the balance financed by a 20-year loan of of $166,400 at 8% interest with equal principal payments made annually.
53,068
18,177
6,472
4,502
3,714
8,320
11,315 10,650
51,543 51,835
-21 1,233 farm management chapter 20
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A lease is a legal contract whereby the landowner gives the tenant the use of the land for a certain time in return for a specified payment. Leases on agricultural land are influenced by local custom.
Type, terms, and length of leases tend to be uniform in an area.
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Rent is paid in cash. It may be due in advance or at the end of the production season.
Under a cash lease, the tenant receives all the income generated and usually pays all expenses except property taxes and other ownership costs of the property.
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Figure 20-3
Average cropland cash rental rates per acre, by region farm management chapter 20
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Table 20-3
Setting a Fair Cash Rent (160 acres)
1. Landowner's Costs
Opportunity cost on investment
Property taxes and insurance
Maintenance
Depreciation
Total
Total cost per acre
2. Tenant's Residual
Gross income
Expenses
fertilizer
seed
Pesticides
trucking
drying
labor and management
machinery
Total expenses
Net income available to pay rent
Net income available per acre
3. Crop share equivalent
Additional income:
Additional expenses:
fertilizer
seed
Pesticides
trucking
drying
Total additional expenses
Additional net income
Additional net income per acre
4. Share of gross income
Gross income
Share of total costs from land
Share of gross income to land
Estimated rent per acre
$240,000 x 5% =
$47,150 x 50% =
6,500 x 50%
3,350 x 50%
4,500 x 50%
500 x 50%
1,300 x 50%
$12,000
2,800
500
800
16,100
$101
$47,150
6,500
3,350
4,500
500
1,300
4,500
8,500
29,150
18,000
$113
$23,575
3,250
1,675
2,250
250
650
$8,075
$15,500
$97
$47,150
35%
$16,502
$103 farm management chapter 20
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Crop share leases are popular in areas where cash grain farms are common.
These leases specify that the landlord will receive a certain share of the crop.
The tenant usually supplies all machinery and labor. Some variable expenses may be split.
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• Labor share lease
• Variable cash lease
• Bushel lease
• Custom farming farm management chapter 20
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Table 20-4
Comparison of Lease Types
Price risk borne by:
Production risk borne by:
Operating capital supplied by:
Management decisions made by:
Marketing done by:
Terms adjust:
Fixed Variable Fixed cash cash bushel
Crop or livestock share
Custom farming
Tenant Both
Tenant Both
Both
Tenant
Tenant Tenant Tenant
Tenant Tenant Tenant
Tenant Tenant Both
Slowly Quickly Medium
Both
Both
Both
Both
Both
Quickly
Owner
Owner
Owner
Both
Owner
Slowly farm management chapter 20
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Fertilizer
(lb)
60
80
100
120
140
160
Table 20-5
Example of Inefficient Fertilizer Use
Under a Crop Share Lease
Yield
(bu)
95
100
104
107
109
110
Marginal input cost at
$0.20/lb ($)
4.00
4.00
4.00
4.00
4.00
4.00
Total marginal value product, corn at
Tenant's marginal value
$2.20 per bu ($) product ($)
11.00
8.80
6.60
4.40
2.20
5.50
4.40
3.30
2.20
1.10
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Table 20-6
Determining Income Shares
Under a Crop Share Lease
Cash Item
Fertilizer
Seed
Pesticides
Trucking
Drying fuel
Labor, management
Machinery ownership
Machinery operating
Property taxes, insurance
Repairs and maintenance
Depreciation of buildings, fences
Opportunity cost for land
Total costs
Percent contributed
Whole Farm
$6,500
3,350
4,500
500
1,300
4,500
5,500
3,000
2,800
500
800
12,000
$45,250
Owner
$3,250
1,675
2,250
0
650
0
0
0
2,800
500
800
12,000
$23,925
53%
Tenant
$3,250
1,675
2,250
500
650
4,500
5,500
3,000
0
0
0
0
$21,325
47% farm management chapter 20
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Conservation can be defined as the use of farming practices that will maximize the net present value of the long-run social and economic benefits from land use. Ordinary budgeting techniques are often inadequate for deciding how best to achieve the goals of conservation.
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Long-Run versus Short-Run Consequences
Most conservation practices require some extra expenditures. They may also reduce crop yields in the short run. The short-run reduction in profit may be necessary to achieve higher profits in the future or to prevent a long-run decline in productivity.
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Most farms and ranches carry out more than one type of crop or livestock enterprise. Farming systems analysis involves understanding how different enterprises affect each other. farm management chapter 20
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Many of the decisions made by farmers and ranchers have consequences that go far beyond the boundaries of the farm.
Agriculture must consider more than just farm input costs when making decisions about input use. The total societal costs of using various technologies is becoming an important factor in choosing practices.
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Both the federal and state governments have enacted laws to promote and sometimes require land use and production practices that preserve and enhance soil, water, and air resources. Future conservation efforts may increasingly become a matter of selecting the least-cost combination of practices to meet the relevant target.
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Land is an essential resource for agricultural production. The decision to buy or lease land will affect the production capacity and financial condition of the business for many years. In making land-use decisions, farmers and ranchers also need to consider the long-run environmental consequences.
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