Farm Leasing Arrangements
Tim Eggers
Field Agricultural Economist
teggers@iastate.edu
712-542-5171
www.extension.iastate.edu/feci
• Leasing Terminology
• Rental Ethics
Agenda
• Trends in: Farmland Values, Cash Rental
Rates, and Costs of Production
• Value of Soil Erosion to Landowner
• 2013? Farm Bill
• Lease Termination
• Points to Consider for 2013 Leasing Year
Drought Detour
•
•
•
•
Current Conditions
Impact for Crop
Communications Opportunity
Farm Lease Considerations
Iowa Crop Conditions as of August 19, 2012
Item
Corn
Soybeans
Pasture & Range
Very
Poor
Poor Fair Good Excellent
%
%
%
%
%
23
14
57
30
23
27
32
38
13
14
23
3
1
2
0
Soil Moisture Condition as of August 19, 2012
SW
%
Districts
SC
%
SE
%
Topsoil moisture
Very short
Short
Adequate
Surplus
84
16
0
0
79
21
0
0
Subsoil moisture
Very short
Short
Adequate
Surplus
83
15
2
0
89
11
0
0
Item
%
Last
Week
%
Last
Year
%
61
36
3
0
60
31
9
0
60
31
9
0
14
35
48
3
65
33
2
0
70
26
4
0
70
26
4
0
9
32
57
2
State
Soil Moisture Condition as of August 19, 2012
WC
%
Districts
C
%
EC
%
Topsoil moisture
Very short
Short
Adequate
Surplus
68
29
3
0
49
31
20
0
Subsoil moisture
Very short
Short
Adequate
Surplus
73
26
1
0
64
29
7
0
Item
%
Last
Week
%
Last
Year
%
36
36
27
1
60
31
9
0
60
31
9
0
14
35
48
3
64
30
6
0
70
26
4
0
70
26
4
0
9
32
57
2
State
Soil Moisture Condition as of August 19, 2012
NW
%
Districts
NC
%
NE
%
Topsoil moisture
Very short
Short
Adequate
Surplus
55
32
13
0
63
35
2
0
Subsoil moisture
Very short
Short
Adequate
Surplus
66
27
7
0
74
25
1
0
Item
%
Last
Week
%
Last
Year
%
55
35
10
0
60
31
9
0
60
31
9
0
14
35
48
3
64
30
6
0
70
26
4
0
70
26
4
0
9
32
57
2
State
Drought Induced Farm Lease
Considerations
•
•
•
•
Communicate with your landowner
Send photos of the crops, pastures
Adjustments for 2012?
Discuss rent for 2013
– Yields down, prices up, rent ??
• Flexible leases: are crop insurance
proceeds included in the rent formula?
Crop Insurance Coverage 2012
• About 90% of Iowa corn and soybeans acres are
covered by MPCI
• 90% of insured acres have Revenue Protection
(RP), 7% Yield Protection (YP)
• YP bushels covered at February futures price
– Corn $5.68 / bushel
– Soybeans $12.55 / bushel
• RP bushels covered at October futures price (if
higher than Feb. price)
– Dec. corn contract, Nov. soybean contract
December 2012 Corn
November 2012 Soybeans
Crop Insurance Coverage 2012
• Guarantee levels:
– 1.5% of acres @ 50%
– 3.9% of acres @ 65%
– 12.5% of acres @ 70%
– 32.9% of acres @ 75%
– 34.2% of acres @ 80%
– 14.8% of acres @ 85%
– 0.7% of acres @ 90%
Example for Corn
•
•
•
•
RP policy @ 80%, 160 bu/a proven yield
October average futures price = $7.70 ?
Guarantee = 80% x 160 bu x $7.70 = $986
Indemnity payment will be:
– Yield > 128 bu/a: none
– Yield = 100 bu/a, 28 bu. x $7.70 = $215.60
– Yield = 50 bu/a, 78 bu. x $7.70 = $600.60
Example for Soybeans
•
•
•
•
RP policy @ 75%, 52 bu/a proven yield
October average futures price = $16.00 ??
Guarantee = 75% x 39 bu x $16.00 = $624
Indemnity payment will be:
– Yield > 39 bu/a: none
– Yield = 30 bu/a, 9 bu. x $16.00 = $144.00
– Yield = 15 bu/a, 24 bu. x $16.00 = $384.00
Remember
• Production is averaged over all acres in
the insured unit
• Prices could go down by October
• Some acres are not insured (10%)
• Some acres have low proven yields
• Can substitute 60% of t-yield for actual
yield for production history
Remember
• Must continue to care for the crop
• Field fires are not covered by MPCI unless
caused by “natural events.”
• Private hail/wind/fire policies may cover all
field fires. May still be available.
• Insurance proceeds can be deferred to next
tax year if >50% of the crop is usually sold
then.
Reporting Losses
• Contact your crop insurance agent before
you harvest or destroy the crop
• Adjuster will evaluate the crop
• Possibilities:
– Declare total loss. Do what you want.
– Partial loss. Leave it until fall and harvest.
– Partial loss. Chop it and leave check rows.
Reporting Losses
• File a claim within 15 days after crop is
harvested.
• If harvested, document production in
usual way.
• Payments over $200,000 per crop in
one county trigger an automatic review
of production data, by the insurance co.
Should I Harvest the Crop?
• Minimum revenue needed
Variable costs for combining
(fuel & repairs, or custom charge)
Expected price
- Extra P and K fertilizer if harvested
(.375 lb. P@$.65, .30 lb. K @$.60)
- hauling ($.15), drying ($.20)
=Net price $7.00 - .42 -.35 =
= Breakeven yield = $15.00 / $6.23 =
$15.00/a.
$7.00? / bu
$.42 / bu.
$.35 / bu
$6.23
2.4 bu/a.
USDA Emergency Programs
• Must be a USDA secretarial disaster
county or contiguous county
– 30% or more damage to at least one crop
– 8 consecutive weeks as “severe drought”
• FSA emergency loans available at
2.25% for actual production losses
• SURE and emergency livestock loss
programs expired in 2011.
USDA Emergency Programs
• FSA emergency loans available at
2.25% for actual production losses
• Haying or grazing of CRP acres
• Livestock Forage Disaster Program and
SURE crop disaster program (expired)
• ACRE still in effect
Emergency Haying or Grazing
of CRP Land
• CRP acres can be hayed or grazed
starting August 1.
• Emergency haying/grazing
– CRP payment reduced 10%
• Must apply to FSA
Haying or Grazing CRP Land
• At least 50% of a field or contiguous
fields must remain unhayed
• At least 25% of a field or contiguous
fields must remain ungrazed or acreage
is grazed at 75% of grazing rate
• One cutting of hay is allowed by 8/31/12
• Hay must be removed from CRP by
9/30/12
Selling Standing CRP Forage
• Seller needs to at least offset loss of CRP
payment.
– Ex. $175 / acre x 10% = $17.50 per acre
Buyer can pay up to value of forage
minus harvesting costs
• Example: 1.5 bales /acre @1200 lb. = .9 t/a
@ $80 (?) / ton = $72.00 / acre forage value
• Minus harvesting costs
–
–
–
–
Mowing, raking = $10.80 + $6.20 = $17.00 /acre
Baling = $10.85 / bale x 1.5 bales = $16.28
Hauling = $3.75 / bale + 5 mi. @ $.20 x 1.5 bales = $7.12
Total costs = $17.00 + $16.28 + $7.12 = $40.40 / acre
• Maximum price to pay = $72.00 - 40.40 = $31.60 /a
Leasing Terminology
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
•
•
•
•
•
•
•
•
Lease Components Terminology
Term
Lease termination
Rental rate/lease
Land use
Repair and improvements
Records and accounts
Right to entry
Signature
Terminology cont.
• Termination – occurs with expiration of
lease, surrender and acceptance,
eviction, or breach of conditions
– written notice required
– Notice
• Description of property
• Termination date
• Signature of party giving notice
Lease Termination - Iowa
• Iowa Farm Leases run from March 1st to the
End of February
• Termination must be given by Sept 1st to be
effective at the end of February the
following calendar year
• Forms can be obtained from the Iowa State
University – Ag Decision Maker
http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-19.pdf
• Does not apply to parcels under 40 acres in
size
Terminology cont.
• Land Use – desired use of land by landlord
–
–
–
–
–
–
–
–
–
Soil fertility
Number of livestock per acre
Types of crops planted
Where specific crops are planted
Weed prevention
Conservation methods
Fertilizer application rates
Removal of minerals, gravel, etc..
Environment protection – soil erosion, care of
permanent crops, and structures
Terminology cont.
• Repair and Improvements
– Who will make necessary improvements
– How they will be made
– Who will pay for improvements
• Records or Accounts
– Production (yield and price)
– Inputs
• Right to Entry
– Tenant may treat any person who sets foot on the
property as a trespasser; statement to provide
landlord with right of entry
Rental Ethics
Terry Kastens and Kevin Dhuyvetter
Kansas State Agricultural Economics
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, geographically, and 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.”
Cash rents fall 20% of the time in Iowa.
On average they rise by 4%.
www.agmanager.info
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 investmentminded heirs acquire land being rented
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
www.agmanager.info
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
Land Value & Cash Rental Rate Trends
Source: ISU Extension Economics, Dec. 2011 and May 2012
Iowa Farmland Value Surveys
• Iowa State University Extension and Outreach
–
–
–
–
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
• Realtors Land Institute
– semi-annual survey (March and September)
– compares land classification by corn production
– includes pasture and timber land
AVERAGE VALUES
all grades 1950−2011
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
Southwest
$5,905
up 36.5%
up $1,579
high $7,418
med $5,553
low $3,824
PERCENTAGE CHANGE
POSITIVE FACTORS
affecting land values
100%
86%
80%
62%
60%
40%
20%
0%
14%
14%
13%
11%
NEGATIVE FACTORS
affecting land values
35%
30%
25%
20%
15%
10%
5%
0%
31%
25%
24%
19%
13%
12%
11%
WHO PURCHASED
farmland
New Farmers
3%
Others
1%
Investors
22%
Existing
Farmers
74%
CHANGE IN
sales activity from previous year
SUMMARY
• 32.5% is highest percentage increase ever
reported
• $6,708 is all-time high inflation adjusted
average value
• An interesting time, many factors to watch
• Not a time to panic
Iowa Rent to Value
11%
10%
9%
8%
7%
6%
5%
4%
3%
USDA
ISU Value USDA Rent
August 2012 USDA NASS
August 2012 USDA WASDE
August 2012 USDA World Agricultural Supply
and Demand estimated the US corn crop at 10.8
billion bushels (last year’s crop was 12.36)
Feed and residual use
Ethanol use
4.1
4.5
1-Dec-11
1-Dec-07
1-Dec-03
1-Dec-99
1-Dec-95
1-Dec-91
1-Dec-87
1-Dec-83
1-Dec-79
1-Dec-75
1-Dec-71
1-Dec-67
1-Dec-63
1-Dec-59
1-Dec-55
1-Dec-51
1-Dec-47
25
Prime Rate (%)
Dec 2008 - current
20
15
10
5
0
9
8
Prime Rate (%)
7
Dec 2008 - current
6
5
4
3
2
1
0
Farm Profitability
“Economic profits” don’t last long in a
competitive market
“Economic profits” destroyed by:
– Falling output prices due to increases in production
– Increased costs
Production costs
Land prices/rents
Number of producers
300
Average Cash Rental Rates
250
District 7
State
200
150
100
2006
2007
2008
2009
2010
2011
2012
Land Image Sites
http://ortho.gis.iastate.edu/
http://www.google.com/earth/
Soil Information Site
http://websoilsurvey.nrcs.usda.gov/
AgDM File C2-87 - Computing the Iowa
Corn Suitability Rating for your Farm
http://www.extension.iastate.edu/agdm/whol
efarm/html/c2-87.html
Calculating CSRs
Ortho.gis
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
us
to
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er
b
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e
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id
e
tili
ze
d
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r
m
t
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C
l
i
e
z
us
e
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to
m
pp
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lic
st
at
ici
io
n
de
Ap
pl
ica
C
us
tio
to
n
m
Co
m
bi
ni
ng
C
H
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s
Fe
r
Se
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Yi
el
d
Percent
Percent of Crop Share Acres with
Equal Division of Costs
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Determining A “Fair”
Cash Rent
Value
December 2013 Corn Futures
November 2013 Soybeans
2013 Crop Cost Estimates
Total Cost
Expected Yield bu/A
Cost Per Bushel
Corn After Corn
$832
165
$5.04
Corn After Beans
$778
180
$4.32
Beans After Corn
$567
50
$11.34
Source: ISU Extension Economics, July 2012
Corn Following Soybeans
160 Bu.
Fixed
Variable
180 Bu.
Fixed
Variable
200 Bu
Fixed
Variable
Per acre
$ 329
$ 370
$ 372
$ 405
$ 412
$ 440
Per bushel
$ 2.06 $ 2.32
$ 2.07
$ 2.25
$ 2.06
$ 2.20
Total cost per acre
$ 700
$ 778
$ 854
Total cost per bushel
$ 4.37
$ 4.32
$ 4.27
Soybeans Following Corn
45 Bu.
Fixed
Variable
50 Bu.
Fixed
Variable
55 Bu
Fixed
Variable
Per acre
$ 308
$ 208
$ 348
$ 217
$ 387
$ 227
Per bushel
$ 6.83 $ 4.63
$ 6.97
$ 4.35
$ 7.04
$ 4.13
Total cost per acre
Total cost per bushel
$ 516
$ 566
$ 614
$ 11.46
$ 11.32
$ 11.17
Power Machinery Cost and
Investment Cost (Per Acre)
400
Mach & Power Cost
Mach & Power Investment
350
300
250
200
150
100
50
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Direct Corn Expenses
Seed
Insecticide
Herbicide
Fertilizer & Lime
Drying & Storage
160
140
120
100
80
60
40
20
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Direct Bean Expenses
50
45
40
35
30
25
20
15
10
5
0
2002
Seed
2003
2004
Insecticide
2005
2006
Herbicide
2007
2008
Fertilizer & Lime
2009
2010
2011
Drying & Storage
DOE Short-term Energy Outlook
August 7, 2012 Release
Price Summary
Year
2010
79.40
3.53
2.99
11.37
2011
94.86
3.53
3.84
10.80
2012
93.90
3.53
3.84
10.83
WTI Crudea ($/barrel)
Gasolineb ($/gal)
Dieselc ($/gal)
Natural Gasd ($/mcf)
a West Texas Intermediate. b Average regular pump price.
c On-highway retail. d U.S. Residential average.
Percent
Change
2013
12-13
90.25 -3.9%
3.33
-5.7%
3.62
-5.7%
11.07
2.2%
http://www.eia.doe.gov/emeu/steo/pub/contents.html
Harrison County Fair Cash Rent
Resources
Cash Rent Market Approach
c2-10 Cash Rental Rates for Iowa 2012 Survey
(released in May)
http://www.extension.iastate.edu/agdm/wholefarm/html/c2-10.html
Methods for Determining Cash Rent Values
c2-20 Computing a Cropland Cash Rental Rate
http://www.extension.iastate.edu/agdm/wholefarm/html/c2-20.html
Assumptions
•
•
•
•
125 crop acres
173 bushel corn yield
47 bushel soybean yield
Direct Government Payments
current farm bill average $22.00 / acre
*Direct Payments may be eliminated with new farm bill
Methods of Farmland Cash Lease
Valuation
1.
2.
3.
4.
Market Value
Yield Value
CSR Value
Return on Investment
USDA Lease Values Survey
ISU Cash Rent Survey
Calculating Cash Rent
1.Market Cash Rent
Harrison County
Overall average
High Quality Third =
Middle Quality Third =
Low Quality Third =
$ 275
$ 338
$ 268
$ 220
Calculating Cash Rent
2 a. Average Rents Per Unit – Corn Yield
Harrison County
Determine Average Rent for Corn
Farm’s Average Corn Yield (bu/A)
173
Times rent per bushel of Corn yield
$ 1.59
Equals the Average Rent for Corn Acre $ 275
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
Calculating Cash Rent
2 b. Average Rents Per Unit – Soybean Yield
Harrison County
Determine Average Rent for Soybeans
Farm’s Average Soybean Yield (bu/A)
X rent per bushel of Soybean yield
= Average Rent for Soybean Acres
47
$ 5.87
$ 276
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
Calculating Cash Rent
2. Average Rents Per Unit – Corn & Soybeans
Add the Average Rent for Both
Corn Average Rent
Soybean Average Rent
$ 275
$ 276
Average Rent Corn & Soybeans
$ 275
Using Corn Suitability Rating (CSR)
3. Average Rents Per CSR Index Point
Harrison County
Determine the Average Cash Rent using CSR
Farm’s Average Corn Suitability Rating
65
X rent per CSR index point
$4.23
= Rent for all Row Crop Acres
$ 275
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
Return on Investment Method
Harrison county farm estimated to have a market value of $6,975 per acre.
Expected Rent: (3.4%) X $6,975 / acre = $237 / acre
Overall Average
Average all 4 Methods (Harrison County)
Method 1:
Method 2:
Method 3:
Method 4:
Typical Cash Rent
Average Rents per Unit
Average Rents per CSR Index Point
Return on Investment
$ 275
$ 275
$ 275
$ 237
Average $266/A
$266 /A X 125 Tillable Acres =
$33,188
Split Payments of $16,594 and $16,594
Additional Methods of Farmland
Lease Valuation
5. Gross Income Method
6. Tenant Residual Method
7. Crop Share Method
Share of Gross Income
CORN:
SOYBEANS:
(173 bu X $5.83) + $22 = $1,031
(47 bu X $12.08) + $22 = $590
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:
SOYBEANS:
Average
$ 1,031/ ac x 23% = $ 237
$ 590/ ac x 34% = $ 201
$ 219
Tenant Residual Method
CORN:
$1,031 - $563 = $467
SOYBEAN:
$590 - $322 = $267
Average:
20% lower prices or yields
$367
$210
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
Crop Share Corn Lease 2013
Landlord
Corn
Tenant
Land
$325
Labor
$ 31
½ inputs
$190
½ inputs
$190
Machinery
$92
Management
$202
½ income $515
½ income $515
Crop Share 50-50 Lease 2013
Landlord
Soybean
Tenant
Land
$213
Labor
$27
½ inputs
$82
½ inputs
$82
Machinery
$72
Management
$114
½ income $295
½ income $295
Cash Rent Survey
Per Bushel Yield
Per CSR Point
Return on Investment
Gross Income
Tenant Residual
Crop Share
Average
Corn
Soybeans
$275
$275
$275
$237
$237
$467
$325
$275
$276
$275
$237
$201
$267
$213
$274
Flexible Lease Arrangements
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
so landlords want to wait
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
Rent varies with yield only
Rent varies with price, only
Share of gross income
Base rent + bonus
Base rent times index
http://www.extension.iastate.edu/agdm/wholefarm/html/c2-21.html
http://www.extension.iastate.edu/agdm/wholefarm/html/c2-22.html
Base Rent
• Historical rent
• Percent of cost of production
• Tenant net margin less management
Determine Actual
Yield
Price
•
•
•
•
Scale tickets
Combine monitors
Storage capacity
Crop insurance
• Cash
• Average of dates
near harvest OR
rent payment
• FSA posted
• Crop insurance
Flexible Cash Plus Bonus
• Base Rent is set, $180/acre
• Base Gross Income is set, $800/ac
– Cost of Production or appropriate ratio
• Agreement on how to split excess
– Gross income is $950/acre
– Split is 40% to landlord.
– Extra rent is $60/ac.
• $240 Total Rent (180+(950-800)*40%)
• May have a cap on payments
Flexible Lease – Base Rent
Times Index
• = Base Rent * (actual price/base price) *
(actual yield/base yield)
• Example
– Base rent = $180
– Price: actual = $5.25
base = $4.50
– Yield: actual = 190 bu base = $175 bu
= $180 * ($5.25/$4.00) * (190 bu/175 bu)
= $228/acre
Flexible Cash Farm Lease Example
Corn in Central Iowa
*Estimate
Source: ISU Extension Farm Management, July 2012
Flexible Cash Farm Lease Example
Soybeans in Central Iowa
*Estimate
Source: ISU Extension Farm Management, July 2012
$200/A Base Rent + Bonus (33% of Net)
$277
Average
$254
Average
$88
$72
$65
$36
$200
$200
$200
$200
$259
Average
$73
$45
$200
*Estimate
Source: ISU Extension Farm Management, July 2012
$250/A Base Rent + Bonus (33% of Net)
$309
Average
$286
Average
$70
$52
$48
$20
$250
$250
$250
$250
$292
Average
$56
$28
$250
*Estimate
Source: ISU Extension Farm Management, July 2012
Value to Landowner of Soil
Erosion to the Landowner
Duffy, Michael
WP #12004, March 2012
Impact of Erosion on Land Values
• Erosion costs the farmer, society and the land
owner
• Whether or not these impacts are captured in the
market depends on individual property and the
extent of eroded soil;
• Study estimated loss in value comparing the
same soils and slope but having a different
erosion phase
• 20 counties were selected at random
Three Estimation Methods
• Change in land value;
– Land value change calculated based on average county
$/CSR point and the CSR point erosion change for each
eroded soil in the county
• Change in rents;
– Rent change calculated using average rent per CSR
point and the decrease due to change in CSR
• Change in production;
– Revenue was based on yield changes using $5.50 corn and $12
soybeans, costs of production from ISU; CC and CSb were
averaged assuming a 60/40 relation between CC and CSb acres
Percent of Cropland Eroded by Selected County
70%
60%
50%
40%
30%
20%
10%
0%
Average Dollar Loss From
Three Estimations per Eroded Acre
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$-
Average Percent of Value Lost on Eroded Soils
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Soil Erosion Conclusions
• Soil erosion decreases productivity,
increases costs for water users, and
decreases the value of the land
• Erosion impact on value is measurable
• Average loss based on 2012 conditions
was $336 or 4.8% of the average value
Farm Bill Indications
Farm Bill 2012
• Nothing happens
• Continuation of current farm program
(probably without direct payments)
• More changes for crop insurance
(lowering of subsidies for those with high
incomes)
• New Farm (Food Stamp) Bill with a
program similar to ACRE
Farm Bill 2012
• Based on multiple years of prices and
yields
• Some “qualifier” to make producers
eligible: based on county yield?, crop
reporting district yield?
• Would provide a couple of years to
prepare for lower prices
• Direct payments are gone?
Direct Payments
Direct payments for 150 acre farm with 75 acres of Corn Base and 75 Acres of
Soybean Base.
Corn
Base ___ * Yield___ * 85 percent (now .835) * $.28 = Payment _____
75 acre corn base * 126 bushel yield * .85 * $.28 = $2,249.10
Soybeans
Base ___ * Yield ___ * 85 percent (now .835) * $.44 = Payment _____
75 acre soybean base * 38 bushel yield * .85 * $.44 = $1,065.90
Farm total is $2,249.10 + $1,065.90 = $3,315 or $22.10 per crop acre
“there is significant evidence that direct payments are capitalized into land values and
consequently increase cash rents” from Sec 1.2
http://www.whitehouse.gov/omb/expectmore/detail/10000438.2008.html
Hazards for 2013
• Interest rate increases
• Price volatility
• New farm bill/understanding
role of crop insurance
• Input price competition for
share of revenue
• Demand shocks
What to Watch
Dr. Michael Boehlje
Distinguished Professor
Purdue University
What to Watch
1.The financial crises in Europe and the EU
2. The sluggishness of the recovery of the U.S.
economy
3. The changing (now rising) value of the dollar
4. The unpredictable future growth of income in
China and Asia more broadly
What to Watch
5. The recent and current weather induced
short supplies of corn, beans and wheat
6. Current and future potential regulations on
production systems (animal welfare,
fertilizer/chemical use, etc.)
7. Increased acreage brought into production
in response to higher prices (123 million
additional acres in the world).
What to Watch
8. Uncertainty about changes in farm policy
9. The timing and amount of future changes
in interest rates
10. Fluctuations in fertilizer, seed, chemical
and energy prices
What to Watch
11. The prospects of a continued boom and
potential bust in farm incomes and land
values among others.
12. Counter party risks.
Other Resources
•
Materials from this meeting
–
•
Online Courses – Ag Management e-School
–
•
http://www.extension.iastate.edu/calendar/
Publications – rental survey, land value survey, etc.
–
•
http://www.extension.iastate.edu/agdm/
Workshops, meetings, conferences
–
•
http://www.extension.iastate.edu/ames
Articles and spreadsheets
–
•
http://www.extension.iastate.edu/feci/Leasing/vflm.html
http://store.extension.iastate.edu/
Private Consultation
–
http://www.extension.iastate.edu/ag/farm-management-0
Farm Leasing Arrangements
Objective: Land Leasing Confidence
 Introduction to Farm Leases
 Cash Rent Leases
 Crop Share Leases
 Custom Farming
 Renting Buildings
 Renting Hay and Pasture Land
Photo courtesy of USDA NRCS
 Legal and Tax Considerations
 Conservation and Environmental Considerations
 USDA Agencies and Programs
 Owner and Operator Relations
www.extension.iastate.edu/ames
Farmland Ownership
Objective: Purchase Plan
 Land Value Trends
 Using Soils Information
 Appraisal Techniques
 Financing Considerations
 Feasibility of a Land Purchase
Photo courtesy of USDA NRCS
www.extension.iastate.edu/ames
Thank You!
Tim Eggers
Field Ag Economist
(712) 303-7781
teggers@iastate.edu
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