p
Chapter 20
Land—Control and Use
The Economics of Land Use and
The Economics of Land Use and Management
Land is a permanent resource that doesn’t
depreciate
p
or wear out. Land is immobile
and cannot be moved.
Because the supply of land is essentially
fixed,, land prices
p
are very
y sensitive to
changes in demand for its products.
The Economics of Land Use and
The Economics of Land Use and Management, said differently.
Land is a permanent resource that doesn’t depreciate or
wear out.
out cannot be depreciated for tax purposes but that
can be mismanaged or degraded. Land is immobile and
cannot be moved.
Because the supply of land is essentially fixed, Agricultural
land prices values are sensitive to changes in demand for
its products, non-ag market forces and often reflect
additional rent capitalization
p
created byy government
g
programs.
Controlling Land Own or Lease?
Controlling Land—Own or Lease?
q
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,
t l which
hi h is
i achieved
hi d by
b ownership
hi or by
b lleasing.
i
* You need to adjust
j your
y
thinkingg to one that utilizes
opportunity costs, incentives and long-term planning if you
are to make informed and intelligent land control decisions.
Thi does
This
d
nott imply
i l that
th t you ought
ht only
l make
k long-term
l
t
land
l d
control arrangements.
O
hi
Ownership
Advantages
1.
Security and independence
2. Loan Collateral – accumulation of equity
3. Hedge Inflation / Investment
4. Emotional
Disadvantages
1.
Cash flow
2. Lower return to land than other uses of assets (?)
3. Less working capital
4
4.
Size limits
Leasing
d a tages
Advantages
1. More working capital
2. Additional management
g
3. Allows flexibility in operation size
4. More flexible financial obligations
4
g
Disadvantages
1. Uncertainty of future control
2. Slower equity accumulation
3. Improvements to land come slower, generally
Lease Type Advantages
Disadvantages
Crop Share* Simple and commonly used.
Changes in technology may
require terms to be
renegotiated.
Risk is equally shared.
shared
Cash Rent
Very simple. Owner has no
A fair cash rent is difficult to
risk.
i k O
Operator
t can make
k own negotiate.
ti t Operator
O
t bears
b
decisions.
all the risk. Owner gives up
control over the farm.
Custom
Operator has no risk.
Diversifies the operator’s
income sources. Owner has
a higher income potential.
Owner retains control.
Owner retains all risk.
Operator has limited income
potential.
*Income and/or expenses may be split in differing proportions.
Economic Feasibility of Owning
Economic Feasibility of Owning Land
We’re asking the question, is owning land profitable? W ’ ki h i i i l d fi bl (We’re not yet ready to address whether or not it is financially feasible )
financially feasible…)
3 What do you need to know?
y Purchase price / value
y Net income YOU expected based on the intended use
p
3 Where can you find the information?
y
Land Appraisal (determining value)
Market data
1.
http://www.landwatch.com/Iowa_land_for_sale/Story_County
y
y
y
y
y
y
y
y
Soil, topography, and climate
Buildings and improvements
g
p
Size
Markets
C
Community
i
Location
Competing uses
Agricultural program characteristics
Land Appraisal (determining value)
2.
2 Income capitalization
Avg Annual Net Return Value =
Discount Rate
Income capitalization ≠ Market data 3
Does the income capitalization method produce the same value of land as market data suggests?
™
3
We did an in‐class example of how to calculate the value of agricultural land based on the typical corn or beans production operation in Iowa using the income capitalization approach.
What happens if the income capitalization approach does not predict (not even close, in many cases) the market value that you observe?
Important Concepts / Topics from Lecture April 9 and Tim Fevold’s Presentation on April 7
− Know the advantages and disadvantages of the two ways to control land - owning and
leasing – for both the operator and the landowner.
− Be able to identify how market price changes, interest rate fluctuations, uncertainty over
yields, and other forms of uncertainty affect the land owner and land operator in both
land-purchase and lease situations.
− Be able to differentiate between the different lease types - cash, crop-share, other – and
know the basic characteristics of each.
− Know the factors that affect the market value of agricultural land and be able to describe
each briefly.
− Be able to describe the Income Capitalization approach to determining the value of land.
− Calculate the Income Capitalization value of land if given a discount rate, expected
revenue / income from the land, and variable and fixed production costs
− Know how changes to the above items (price, yields, fixed and variable costs, discount
rates, etc) affect the value of land if using the Income Capitalization method.