Agenda
Trends in Farmland Values
Trends in Farmland Leasing Trends
Share Leases Exist
Farm Leasing Relationships
Determining a "Fair" Cash Rental Rate
Flexible Cash Leases
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
– SoilView
December 2008 Corn Futures
December 2009 Corn Futures
November 2008 Soybean Futures
November 2009 Soybeans
U.S. Ethanol Industry
Current ethanol capacity:
141 plants, 8 billion
gallons/year
Total capacity under
construction and expansion:
5.4 billion gallons/year
59 new ethanol plants and 7
expansion projects underway
2.1 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year.
3.2-3.5 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008
marketing year.
http://www.dtnethanolcenter.com/images/e0010039/ethanol_plants.html
+1
+24
+18
-79
-10
U.S. Biodiesel Industry
Current biodiesel capacity:
171 plants, 2.24 billion
gallons/year
Total capacity under
construction and expansion:
1.23 billion gallons/year
60 new plants underway
2.8 billion pounds of soybean oil was used in producing biodiesel in 2006/2007 marketing year.
3.8 billion pounds of soybean oil are expected to be used in producing biodiesel for 2007/2008
marketing year.
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
Recent Land Value Estimates
• Chicago Fed 17% increase April to April
• RLI 9.5% increase September to March
Average Values All Grades
1950-2007
Percentage Changes
Percentage Change
Increased up to 20%
Increased 20.1 to 22.5%
Increased 22.6 to 25.0%
Increased 25.1% or more
Percentage Change Adjusted
for Inflation, 2007 Dollars
Positive Factors Affecting
Land Values, 2003-2007
Who Purchased Farmland
Change in Sales Activity
Distribution of Iowa Farmland by Age of Owner and Year
30%
25%
20%
15%
10%
5%
0%
< 25
25-34
1982
35-44
1992
45-54
55-64
2002
65-74
2007
> 75
Percent of Iowa Farmland Owned Based on
Age and Gender, 2007
.29
30%
25%
.18
20%
15%
10%
5%
0%
<35
35 - 65
Female
>65
Male
Distribution of Iowa Farmland by Tenure Type
60%
50%
40%
30%
20%
10%
0%
Owner operator
Cash rent
1982
1992
2002
Crop share rent
2007
Percent of Farmland with Professional Farm Manager
or Being Custom Farmed
5.0%
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Professional farm manager
Custom farmed
Percent of Leased Farmland by Lease Arrangement
80%
70%
60%
50%
40%
30%
20%
10%
0%
1982
1992
Cash rent
2002
Crop share
2007
Other
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
Percent of Farmland Acres Based on Number of Years Crop
Share Lease Has Been in Effect
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
1 to 5
6 to 10
11 to 15
16 to 20
> 20
us
to
m
r
er
b
ic
id
e
ec
tic
id
e
tili
ze
d
Fe
Li
r
m
t
i
C
l
i
e
z
us
e
rA
to
m
pp
Pe
lic
st
at
ici
io
n
de
Ap
pl
ica
C
us
tio
to
n
m
Co
m
bi
ni
ng
C
H
In
s
Fe
r
Se
e
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%
Percent of Crop Share Acres by Who
Decides on Crop Insurance
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Owner
Tenant
Both
Separate
No insurance
Crop Share 50-50 Lease
Landlord
Corn
Tenant
Land
$305
Labor
$ 29
½ inputs
$199
½ inputs
$199
Machinery
$107
Management
$169
½ income
$504
½ income
$504
Crop Share 50-50 Lease
Landlord
Soybeans
Tenant
Land
$192
Labor
$ 27
½ inputs
$114
½ inputs
$114
Machinery
$ 79
Management
$ 85
½ income
$305
½ income $305
Increased Costs of Production
Corn
$73.50
$97.20
$71.40
$39.60
Seed
Nitrogen
Phosphate
Potash
Soybeans
$37.20
Seed
$45.90
$61.20
Phosphate
Potash
Power Mach Cost vs Invest. Cost
(Per Acre)
Low $96
Mid $76
High $72
Machinery costs
Fixed costs
Variable costs
Depreciation
Repairs
Interest
Labor
Storage
Fuel
Insurance
Percent of Leased Farmland by Lease Arrangement
80%
70%
60%
50%
40%
30%
20%
10%
0%
1982
1992
Cash rent
2002
Crop share
2007
Other
Percent of Acres by Number of Years Cash
Lease has been in Effect
35%
30%
25%
20%
15%
10%
5%
0%
1 to 5
6 to 10
11 to 15
16 to 20
> 20
Percent of Cash Rent Acres Based on
Length of Lease
80%
70%
60%
50%
40%
30%
20%
10%
0%
One
Two
Three
Five
Indefinite
na
n
G
oo
or
k
w
ith
n
al
ly
at
io
rs
on
y
le
es
t
rm
er
st
ab
er
v
w
co
ns
pe
C
an
d
fa
m
ily
rm
er
Fa
fa
H
on
ci
al
ly
Kn
ow
Fi
g
d
ni
n
G
oo
Be
gi
n
Percent of Farmland Rented by the Top Reasons for Choosing the Tenant
70%
60%
50%
40%
30%
20%
10%
0%
Leasing Video
• 3 Interviews - 15 minutes (:24 - :38)
– Young farmer
– Established farmer
– Father-Son farming operation
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
Percent of Acres by Lease Type and Characteristic
80%
70%
60%
50%
40%
30%
20%
10%
0%
Cash
Crop Share
Written
Relative
All Leases
Fixed term
Improving Negotiation Skills
• Focus on win-win situations
• Introduce funny money
• Don’t underestimate your position at the
bargaining table
• Formulate a resistance point
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 2008 Survey (released in June)
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 $ 160
High Quality Third =
$ 196
Middle Quality Third = $ 158
Low Quality Third =
$ 125
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
$ 1.02
$ 183
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
$ 3.38
Equals the Average Rent for Soybean Acres $166
Calculating Cash Rent
2. Average Rents Per Unit – Corn & Soybeans
Add the Average Rent for Both
Corn Average Rent
Soybean Average Rent
$ 183
$ 166
Average Rent Corn & Soybeans $ 174
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
$ 2.07
Equals the Average Rent for all Row Crop Acres
$
174
Source: ISU Extension Publication FM- 1851
Overall Average
Average all 3 Methods
Method 1: Typical Cash Rent
$ 196
Method 2: Average Rents per Unit
$ 174
Method 3: Average Rents per CSR Index Point $ 174
Average $181 /A
$181/A X 265 Tillable Acres =
$47,965
Split Payments of $23,983 and $23,982
Source: ISU Extension Publication FM- 1851
Distribution of Cash Rented Land
by Payment Distribution
60%
50%
40%
30%
20%
10%
0%
100%
50 - 50
Thirds
One third/two
thirds
Other
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
Direct Government Payments
– 2002-07 average $22.00 / acre
• DCP no change
• ACRE change
Harvest Price Projections
Date
Corn Price
Soybean Price
Today
$5.90
$12.23
last week
$5.70
$11.61
early August
$4.98
$10.54
mid July
$5.51
$12.02
early July
$6.02
$13.54
June
$6.43
$13.01
April 2008
$5.65
$11.50
$3.50
$8.70
Dec 09 - $0.50
Nov 09 - $1.20
July 2007
Dec 08 - $0.50
Nov 08 - $0.50
Direct Corn Expenses
Direct Bean Expenses
380.00
CfC Seed, Chemicals, etc.
330.00
CfS Seed, Chemicals, etc.
Soybean Seed, Chemicals, etc.
280.00
230.00
180.00
130.00
80.00
2002
2003
2004
2005
2006
2007
2008
2009
Share of Gross Income
CORN:
(179 bu X $5.51) + $22 = $1,008
SOYBEANS: (49 bu X $12.02) + $22 = $611
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:
$1,008/ac x 35% = $353
SOYBEANS:
$ 611/ac x 40% = $275
Average
$ 314
Tenant Residual Method
CORN:
$1,008 - $561 = $447
SOYBEAN:
$ 611 - $349 = $262
Average:
25% lower prices or lower yield
20% lower prices or lower yield
$355
$158
$197
Crop Share Method 50-50 Share
Corn:
50% of gross minus owner’s costs
$504 - $199 = $305
Soybeans:
50% of gross minus owner’s costs
$305 - $114 = $192
Average:
$244
(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 $5,000 per acre.
Expected Rent: (4%) X $5,000 / acre = $200 / acre
5.66%
Corn
Soybeans
Cash Rent Survey
Per Bushel Yield
Per CSR Point
Gross Income
Tenant Residual
Crop Share
Return on Investment
$196
$183
$174
$353
$447
$305
$200
$196
$166
$174
$275
$262
$192
$200
Average
$265
$209
July 2008 Average
July 2007
July 2006
$237 --- 27% increase
$186 --- 43% increase
$130
Corn
Soybeans
Cash Rent Survey
Per Bushel Yield
Per CSR Point
Gross Income
Tenant Residual
Crop Share
Return on Investment
$196
$183
$174
$227
$88
$125
$200
$196
$166
$174
$202
$99
$111
$200
Average
$170
$164
July 2008 @ $3.50 and $8.70
July 2007
July 2006
$167 --- 10% decrease
$186 --- 43% increase
$130
Percent of Cash Rented Acres by Cash Rent Type
or How the Other 10% Live
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Fixed
Yield only
Price only
Yield and Price
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.
Hazards for 2008 – July 2007
• 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
Hazards for 2008/09 – July 2008
• Economic Profits
• Yields
– low or at insurance coverage levels due to delayed planting
• Price
– $4.14 and $9.19 new break even prices
• Food vs. Fuel debate
– increased popular press discussion & ethanol plants coming
online
• Farm Bill implementation
– ACRE confusion
• Estate and general tax issues to be addressed with
new legislature in 2009
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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