Farm Leasing Arrangements
Tim Eggers
Field Agricultural Economist
teggers@iastate.edu
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:
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–
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
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
Iowa Farmland Value Surveys
• Iowa State University Extension
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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
Southwest
$4,325
up 21.5%
up $766
high $5,335
med $4,140
low $2,868
AVERAGE VALUES
all grades 1950−2010
POSITIVE FACTORS
affecting land values
NEGATIVE FACTORS
affecting land values
WHO PURCHASED
farmland
Estimates of average dollar value per acre by crop reporting districts as of Nov. 1, 2010
First line: high, medium, and low grade farmland values
Second line: district averages
Third line: average percent change since Nov. 1, 2009
Iowa Rent to Value
11%
10%
9%
8%
7%
6%
5%
4%
3%
USDA
ISU Value USDA Rent
CHANGE IN
sales activity from previous year
Iowa Farm & Land Chapter #2
Realtors Land Institute March 2011
August 2011 USDA NASS
$196 average cash rent
3.5% rent/value
Land Bubble or Landmine
August USDA World Agricultural Supply and
Demand estimated the US corn crop at 12.91
billion bushels
Feed and residual use
Ethanol use
4.9
5.1
Interest Rates
Impacted by exchange rates
Farm Profitability
Demand for food, fiber and fuel
38%
39%
Prime Interest Rate
20
18
16
14
12
10
8
6
4
2
0
1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011
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
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
Page, Montgomery, Mills, and Fremont
County Cash Rental Rates 2006-11
$220
$210
$200
$ per Acre
$190
Fremont
Mills
Montgomery
Page
District Average
$180
$170
$160
$150
$140
The average rental rate for
Crop Reporting District 7
has increased by 75%
or $92 per acre since 2006
$130
$120
2006
2007
2008
2009
2010
2011
Land Quality Sites
http://ortho.gis.iastate.edu/
http://websoilsurvey.nrcs.usda.gov/
http://www.google.com/earth/
Calculating CSRs
Ortho.gis
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
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Percent
Percent of Crop Share Acres with
Equal Division of Costs
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Putting a Lease Together
• Determine the goals for each party
– production with the highest potential return
– fair return to each party
– continuity of income year to year
– minimize risk
– improve communication skills
• Put the agreement in writing • Both parties should be accountable to
the lease arrangements established
Determining A “Fair”
Cash Rent
Value
December 2012 Corn Futures
November 2012 Soybeans
Power Machinery Cost and
Investment Cost (Per Acre)
Direct Corn Expenses
Direct Bean Expenses
Fuel Costs
August 9, 2011 Release
Price Summary
Year
Percent Change
2009 2010 2011 2012 09-10 10-11 11-12
WTI Crudea ($/barrel)
61.65 79.40 95.71 101 28.8 20.5
5.5
Gasolineb ($/gal)
2.35 2.78 3.53 3.64 18.4 26.9
3.1
Dieselc ($/gal)
2.46 2.99 3.83 3.96 21.5 28.0
3.4
Natural Gasd ($/mcf)
12.12 11.18 11.22 11.93 -7.8 0.4
6.3
a West Texas Intermediate. b Average regular pump price.
c On-highway retail. d U.S. Residential average.
http://www.eia.doe.gov/emeu/steo/pub/contents.html
Page County Fair Cash Rent
Crop Share 50-50 Lease
Landlord
Corn
Tenant
Land
$301
Labor
$ 31
½ inputs
$185
½ inputs
$185
Machinery
$ 67
Management $ 60
½ income
$472
½ income
$472
Profit
$129
Crop Share 50-50 Lease
Landlord
Soybeans
Tenant
Land
$225
Labor
$ 27
½ inputs
$91
½ inputs
$ 91
Machinery
$ 59
Management
$ 60
½ income
$314
Profit
$77
½ income $314
Assumptions
Location:
Tillable Acres:
Corn Yield:
Soybean Yield:
Corn Suitability Rating:
Page County
140 Acres
151 bu/Acre
48 bu/A
71 CSR
Cash Rent Market Approach
c2-10 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/Paying
Average Yields
Corn Suitability Rating (CSR)
2011 Iowa Cash Rent Survey
224
220
227
213
223
226
177
219
198
What Others are Charging/Paying
District 7
County Page
Determine Overall average
$210
High Quality Third
Middle Quality Third
Low Quality Third
$ 269
$ 197
$ 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)
Times rent per bushel of Corn yield
Equals the Average Rent for Corn Acre
151
$ 1.39
$ 210
Average Yields – Soybeans
Find 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 Yields
Average the two averages
Corn Average Rent
Soybean Average Rent
$ 210
$ 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
71
Times rent per CSR index point
$ 2.95
Equals the Average Rent for all Row Crop Acres
$ 209
Average of first three methods
What Others are Charging/Paying
Average Yields
Corn Suitability Ratings
$ 210
$ 211
$ 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
Assumptions
December 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
Soybeans
CORN:
SOYBEANS:
Average
(151 bu X $6.09) + $25 = $945
(48 bu X $12.58) + $25 = $629
$ 945/ac x 24% = $ 227
$ 629/ac x 35% = $ 220
$ 223
Return on Investment
market value of $3,816 per acre
Expected Rent: (3.4%) X $3,816/ acre
= $130 / acre
Crop Share Equivalent
50% of gross minus owner’s costs
Corn:
Soybeans:
Average
$472 - $185 = $301
$314 - $91 = $225
$263
Tenant’s Residual
Corn:
$ 945 - $527 = $ 417
Soybeans:
$ 629 - $332 = $ 297
Average:
$ 357
Summary of Methods
What Others are Charging/Paying
Average Yields
Corn Suitability Rating
Share of Gross Crop Revenue
Return on Investment
Crop Share Equivalent
Tenant’s Residual
Average
$210
$211
$209
$223
$130
$263
$357
$229
2012 Crop Costs Estimates - Corn following Soybeans
$869
$796
$782
160 bu.
$4.51/bu
180 bu.
$4.42/bu
200 bu.
$4.35/bu
2012 Crop Cost Estimate - Soybeans
$594
$503
45 bu.
$11.19/bu
$548
50 bu.
$10.97/bu
55 bu.
$10.80/bu
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
Legal Issues
Mowing 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. 562.5A
In 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
Agricultural Assessment Limitation
Factor (Rollback)
100%
95%
90%
85%
80%
75%
70%
65%
Are you willing to sell for the
capitalized or taxable value?
Source
Per Acre
Per 40
Per
Quarter
Section
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 Parcel
Capitalized Value
2009 Rollback
Taxable Value
Total Millage
Total Property Tax
per acre
$41,440
* 0.6627143%
$27,443
$27.2765 per $1,000
$748.55
$18.71
Taxation for a 40 Acre Parcel in Page County
2003/04 to 2010/11
$700
$600
$500
$400
$300
$200
$100
$-
Tax Dollars
FY11 Page County
Property Taxes Collected
Townships,
$139,614.78 ,
0.82%
Schools,
$7,877,523.65
, 46.32%
Area School
(IWCC),
$420,208.55 ,
2.47%
Cities,
$4,334,388.94
, 25.49%
Assessor,
$272,055.69 ,
1.60%
Ag Extension,
$131,340.99 ,
0.77%
Bruc. T.B.,
$1,771.55 ,
0.01%
County,
$3,828,065.14
, 22.51%
Page County Levies
General Basic
General Supplemental
MH-DD Services
Rural Services Basic
Debt Service
Assessor
Agricultural Extension
State (Bruc & TB Erad)
Area College
Grant Township –
Shenandoah School District
Township
$/$1,000
$3.50
$1.25038
$1.18722
$2.63355
40 acre example
$96.05
$34.31
$32.58
$72.27
$0.52213
$0.25207
$0.0034
$0.8038
$14.33
$ 6.92
$ 0.09
$22.06
$16.80394
$0.32001
$461.15
$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
–
•
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 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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