Dr. Edwards Leasing Discussion

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Farmland Leasing
Economics 333
Types of Rental
Arrangements
Cash Rent
Flexible Cash Rent
Crop Share
50-50 Tenant & Landlord
67-33 Tenant & Landlord
Custom Farming
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
Cash Rent
 Simple,
few chances for confusion
 Owner does not need to make day to
day decisions
 Owner has limited risk
 Tenant has more freedom in planning
 Tenant has fewer records to keep
How Much Rent to Pay? Or Charge?
 Based
on survey results
 Based on expected yields
 Based on CSR
 Based on % of gross income
 Based on return on investment
 Based on crop share equivalent
 Based on tenant’s residual
Supporting Information
Location:
Acres
Tillable Acres:
Corn Yield:
Soybean Yield:
Corn Suitability Rating:
Iowa County
280 acres
264 Acres
179 bu/Acre
54 bu/A
84 CSR
Expected Prices
 Local
forward contracting opportunities
 Futures prices minus basis
 Outlook information
 Past averages
 Example:
Corn
$3.75/bu
Soybeans
$8.60/bu
Expected Prices and Costs
Seed
Fertilizer + lime
Pesticides
Crop insurance
Interest + misc.
Fuel, repairs
Machinery own.
Drying, storage
Labor + mgmt.
Total
Corn
$100
$119
$35
$20
$24
$31
$35
$23
$46
$433
Soybeans
$57
$97
$30
$12
$20
$21
$26
$0
$39
$302
Calculating Cash Rent Values
Cash Rent Market Approach
Ag Decision Maker website
http://www.extension.iastate.edu/agdm/
Cash Rental Rates for Iowa 2010 Survey (file C2-10)
Calculating Cash Rent
1.Typical Cash Rent
Select the Area of the State/County
Area
6
County Iowa
Determine Overall average $193
High Quality Third =
$ 224
Middle Quality Third = $ 195
Low Quality Third =
$ 161
C. Expected Yield, Corn
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
$ 1.13
$ 202
C. Expected Yield, Soybeans
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)
Times rent per bushel of Soybean yield
Equals the Average Rent for Soybean Acres
54
$3.76
$ 203
D. 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
$ 2.51
Equals the Average Rent for all Row Crop Acres
$ 211
Source: ISU Extension Publication FM- 1851
Web Soil Survey – Home
http://websoilsurvey.nrcs.usda.gov/app/HomePage.htm
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
Cash Rent as % of Crop Value
60%
50%
40%
30%
20%
SOYBEANS
10%
CORN
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
Average Iow a yields and Oct.-Dec. prices, excluding USDA direct payments.
2009
A. Share of Gross Income
CORN:
(179 bu X $3.75) + $25 = $696
SOYBEANS: (54 bu X $8.60) + $25 = $489
Iowa cash rents typically are equal to about 30 to 40 percent of the gross
income from producing corn, and 40 to 45 percent of the gross income
from producing soybeans.
Cash Rental Rate
CORN:
$ 696/ac x 30% = $ 209
SOYBEANS:
$ 489/ac x 40% = $ 196
B. Tenant Residual Method
CORN:
$ 696 - $433 = $ 264
SOYBEAN:
$ 489 - $302 = $ 187
Average:
$ 225
E. Return on Investment
Iowa County farm estimated to have a market value of $4,183 per acre.
Expected Rent: (4%) X $ / acre = $167 / acre
What is a fair rent?
Survey
Average Rents per bushel
Average Rents per CSR Index Point
Percent of gross crop value
Tenant’s residual
Flexible Cash Rent
 Limited
risk for landlord
 Landlord can participate in increased
prices and yields
 Payment is in cash, do not need to
market crops
 Do not need to renegotiate each year
Flexible Rent: Type 1





No base rent or base revenue
Rent = Actual yield x actual price x 33%
No maximum or minimum rent
Example: Actual corn yield = 185 bu/acre
Closing corn bids at Williamsburg elevator





Oct. 1
Nov. 1
Dec. 1
Average
$3.84
$3.74
$3.70
$3.76
Rent = 185 bu. x $3.76 x 33% = $230
Flexible Rent: Type 2
 Rent
= Base rent + 50% of profit
 Base rent = $150
 Nonland costs of production = $302 (beans)
 Total cost including base rent = $462
 Actual gross = (60 bu. x $8.15) + $25 = $514
 “Profit” = $514 - $462 = $52
 Rent = $150 + (50% x $52) = $176
Crop Share
Crop & Price risk are shared equally
A second USDA payment limitation is
created
Crop Share Percentages
50-50 Tenant & Landlord
67-33 Tenant & Landlord
Possible self employment tax for landlord
Crop Share 50-50 Lease
Landlord
Tenant
Labor
Land
½ inputs
½ inputs
Machinery
Management
½ income
½ income
Custom Farming
 Very
little financial risk for operator
 Owner benefits from higher prices,
government programs
 Only one party markets grain
 Agreements are simple and straight
forward
 Tax implications- self employment
 Timing of operations can be
troublesome
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