Farm Leasing
Arrangements
Tim Eggers
Field Agricultural Economist
teggers@iastate.edu
712-542-5171
www.extension.iastate.edu/feci
Agenda
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Iowa Nutrient Reduction Strategy
Flexible cash leases
Landlord liens
Agricultural Act of 2014
CSR2 use
Bioenergy (CENUSA, POET, DUPONT)
Beginning Farmer Tax Credit
Trends in
– Farm land values
– Cash rental rates
– Costs of Production
Situation
• Increasing concern about the quality of
local and regional waters
• Substantial demand for agricultural
products
• 2008 Hypoxia Action Plan
– development and implementation of N and P
reduction strategies for Mississippi/Atchafalaya
River Basin states
Cost of Lost Soil and
Nutrients
• Loss of in-field
productivity
• Off-site water
quality impacts,
locally and in the
Gulf of Mexico
• Eventual decline
in land value
Duffy, 2013
Why? And why now?
• Iowa’s productive soils and cropping systems
also contribute to water quality concerns
• Society and EPA expect more from cities,
industry and agriculture
• Gulf Hypoxia Task Force requires plan to
reduce N and P load to Gulf by 45%
• EPA requests strategy that emphasizes state
implementation of new and existing N and P
practices for point and non-point sources
What is the Iowa Nutrient
Reduction Strategy?
• Voluntary, science-based program to reduce
Nitrogen and Phosphorous impact on water
• Includes cities, industry and agriculture
• A practice-based approach to show
meaningful and measureable progress
• A framework for innovation and verification
of new practices and technologies
Can we achieve the nutrient
reduction goals for Gulf of
Mexico Hypoxia?
• Not simple
– Not as simple as just fine-tuning
nutrient management
• Not impossible
Many Options
Nitrate-N Reduction Practices
Nitrogen
Management
Land Use
Edge-of-Field
Practice
% Nitrate-N Reduction
[Average (Std. Dev.)]
% Corn Yield
Change
Timing (Fall to spring)
6 (25)
4 (16)
Nitrogen Application Rate (Reduce
rate to MRTN)
10
-1
Nitrification Inhibitor (nitrapyrin)
9 (19)
6 (22)
Cover Crops (Rye)
31 (29)
-6 (7)
Perennial – Pasture/Land retirement
85 (9)
Perennial – Energy Crops
72 (23)
Extended Rotations
42 (12)
Controlled Drainage
33 (32)*
Shallow Drainage
32 (15)*
Wetlands
52
Bioreactors
43 (21)
Buffers
91 (20)**
*Load reduction not concentration reduction
**Concentration reduction of that water interacts with active zone below the buffer
7 (7)
Phosphorus Reduction Practices
Phosphorus
Management
Land Use
Edge-of-Field
Practice
% Phosphorus-P
Reduction [Average (Std.
Dev.)]
% Corn Yield
Change
Producer does not apply
phosphorus until STP drops
to optimal level
17 (40)
0
No-till (70% residue) vs.
conventional tillage (30%
residue)
90 (17)
-6 (8)
Cover Crops (Rye)
29 (37)
-6 (7)
Perennial – Land retirement
75 (-)
Pasture
59 (42)
Buffers
58 (32)
Terraces
77 (19)
Assessment did not include stream bed and bank contributions although
recognized as significant
Nutrient Value of Lost Soil
• Each ton of soil contains an estimated
– 2.32 pounds of Nitrogen @ $0.44 per pound
– 1 pound of Phosphorus @ $0.43 per pound
• Value in nutrients = $1.45 per ton of soil
• Average Iowa farm is 333 acres
• $2,414 in lost nutrients alone, per year
Duffy, 2013
Summary
• To achieve goals will require a
combination of practices – conservation
systems approach
• N versus P may require different practices
• Multiple benefits and costs of practices
need to be considered
• Targeting of practice placement will be
critical (Precision Conservation)
Crop Share vs Cash vs Flex
$ per acre
270
250
230
210
190
170
150
130
Crop Share
Cash
110
90
Flex Rent
Flexible Cash Lease
• Rent is paid in cash
• Actual rent paid each year is determined
by a formula that includes any or all of:
– Actual price
– Actual yield
– Costs of production
• Also called “variable” cash leases
Reasons for Flexible Leases
• Fewer landowners and tenants want to be
involved in crop share leases
• Still recognize a need for sharing risk
• Prices and yields have been volatile in
recent years
• Cash rents have lagged behind profits in
crop production
• Neither party enjoys renegotiating annually
Direct Corn Expenses
$200
Seed
Insecticide
Herbicide
Fertilizer & Lime
Drying & Storage
$180
$160
$140
$120
$100
$80
$60
$40
$20
$0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Direct Bean Expenses
60
Seed
Insecticide
Herbicide
Fertilizer & Lime
Drying & Storage
50
40
30
20
10
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Prevalence of Flexible Leases
• Iowa land tenure surveys
– 1993: 3.5% of cash rented acres
– 2003: 11% of cash rented acres
– 2007: 12% of cash rented acres
– 2012: 16% of cash rented acres
Types of Flexible Cash Farm Leases
• Option A: Rent = % of gross revenue
• Option B : Rent = base rent + bonus
– Bonus = (Gross Crop Revenue – Base Crop
Cost Estimate) x %
– Base Crop Cost Estimate = Input costs + Base
rent
$350
$330
$310
$290
$270
Base Rent
$250
Percent of Gross
Base Rent + Bonus
$230
$210
$190
$170
$150
2010
2011
2012
2013
2014*
Assuring the Rent is Paid
• How can parties
assure one another
that the rent will be
paid?
First Step?
-- Use a written lease.
And, be sure that:
(1) The legal description
and parcel number in
the lease is accurate.
(2) The parties to the lease
are properly identified.
(3) The lease terms are
clear.
Landlord’s Lien Law
• Iowa’s Landlord Lien Law went into
effect on July 1st, 2001
– Applies to existing farm leases
– Gives landowners priority in collecting rent
owed by their farm tenants
– Landowner must have filed a Uniform
Commercial Code (UCC) with Secretary of
State where tenant does primary business
Landlord’s Lien Law
• Amended by the Iowa General Assembly
in 2002
– UCC Financing Statement, once filed,
continues to be effective until a
termination statement is filed so long as
the parties (landlord and tenant) remain
the same.
Landlord Lien Law
• A financing statement filed to perfect a lien
in farm products must include a statement
that it is filed for the purpose of perfecting
a landlord’s lien.
• Must be filed with Secretary of State within
20 days of when the lease goes into effect
Should you “do it yourself”?
• Just having the language in the lease is not enough.
• Creation, filing and perfection of a Landlord Lien is
a complicated legal procedure involving intricacies
of Iowa law (Iowa Code ch 570 and related
sections) and Uniform Commercial Code (UCC)
(Iowa Code ch 554).
• Owner-Landlords who wish to do this may find it
advisable to hire an attorney to be certain that all
legal documents and procedures are correctly
followed.
https://sos.iowa.gov/business/FormsAndFees.html#UCC
The Agricultural Act of 2014
Base Acres
Keep current base acres or do a one-time
“reallocation” of base acres
Reallocation allowed to covered
commodities planted between 2009 and
2012
Reallocation in proportion to the ratio of 4-yr
average plantings/prevented plantings
Total number of base acres limited to total
of existing base acres
Payment Yields
Keep current CCP payment yield or do a
one-time “update” of payment yield on a
commodity-by-commodity basis
Update: 90% of 2008-2012 yield per
planted acre on the farm
If the farm yield is below 75% of the 20082012 average county yield, then the farm
yield is replaced by 75% of the 2008-2012
average county yield
Price Loss Coverage (PLC)
Price-based support program
Works like CCP
Payment rate = Max(0, Reference price –
Max(Marketing year average price or
Loan rate))
Reference prices are:
Corn $3.70, Soybeans $8.40
PLC vs. CCP and DP
Agriculture Risk Coverage (ARC)
 Revenue-based support program
 Revenues based on 5-year Olympic average
yields and prices
 Triggers at county or individual farm level,
instead of state level
 ARC choice:
Individual ARC: crop revenues are combined
County ARC: revenues are crop-by-crop
Supplemental Coverage Option (SCO)
An additional policy to cover “shallow losses”
Shallow loss = part of the deductible on the
producer’s underlying crop insurance policy
SCO has a county-level payment trigger
Indemnities are paid when the county
experiences losses greater than 14%
Premium subsidy: 65%
Starts in 2015
Can’t have ARC and SCO together
Three Choices
PLC + SCO
Price protection with top-up county-level
insurance protection, paid on 85% of base
ARC-County
County-level revenue protection based on
historical averages, paid on 85% of base
ARC-Individual
Farm-level revenue protection based on
historical averages, paid on 65% of base
Once chosen, locked in until 2018
Two Waves
First wave: Choice on base acreage and
yield updating
Probably occurs late summer timeframe
Second wave: Choice on farm bill programs
Probably late fall/early winter
Harvest the crop and farm bill at the same time
Bioenergy Options
 New farm bill
pushes land out
of CRP
 Energy laws
require more
bioenergy
content
 Perennial grass
crops provide
environmental &
energy benefits
New Bioenergy Grasses Developed
 Liberty, a new
switchgrass
variety, enters
the market in
2016
 Liberty yields
40% more
traditional
switchgrasses
 Designed for
bioenergy
http://www.usda.gov/nass/PUBS/TODAYRPT/land0814.pdf
AgLetter
Federal Reserve Bank of Chicago
Realtors Land Institute
March 2014 Survey
Statewide Average
$8,716
up 5.1%
up $420
High Grade Land
$10,828
up 6.3%
up $646
Medium Grade Land
$8,047
up 3.5%
up $274
Low Grade Land
$5,298
up 3.5%
up $179
Northwest
$10,960
down 3.9%
down $445
high $12,824
up 2.8%
med $9,918
up $83
low $6,845
North Central
$9,818
up 2.7%
up $258
high $11,159
med $8,824
low $6,421
Northeast
$9,161
up 7.5%
up $638
high $11,423
med $8,573
low $5,670
West Central
$9,449
up 2.5%
up $233
high $11,591
med $8,725
low $5,926
Central
$9,877
up 5.5%
up $512
high $11,803
med $8,930
low $5,918
East Central
$9,327
up 10.8%
up $906
high $11,631
med $8,567
low $5,449
Southwest
$7,531
up 7.4%
up $517
high $9,591
med $7,137
low $4,592
South Central
$4,791
up 11.2%
up $483
high $7,150
med $4,715
low $2,843
Southeast
$6,994
up 13.3%
up $822
high $9,785
med $6,605
low $3,651
POSITIVE FACTORS
affecting land values
60%
50%
56%
40%
37%
30%
20%
10%
0%
24%
15%
14%
13%
11%
NEGATIVE FACTORS
affecting land values
80%
70%
76%
60%
50%
40%
30%
20%
21%
10%
13%
11%
10%
10%
0%
Low
commodity
prices
Weather
Poor yields
Govt
Uncertainty Long term
programs
interest
rates
WHO PURCHASED
farmland
New Farmers
3%
Others
1%
Investors 18%
Existing Farmers
78%
WHO PURCHASED
farmland
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1989
1992
Farmers
1995
1998
Investors
2001
2004
2007
New Farmers
2010
Other
2013
SALES ACTIVITY
relative to previous year
70%
60%
50%
40%
30%
20%
10%
0%
1986
1989
1992
More
1995
1998
Less
2001
2004
2007
Same
2010
2013
CHANGE IN
sales activity from previous year
More – 16%
Less – 53%
Same – 31%
More – 20%
Less – 45%
Same – 35%
More – 8%
Less – 71%
Same – 20%
More – 9%
Less – 59%
Same – 33%
More – 18%
Less – 40%
Same – 41%
More – 16%
Less – 48%
Same – 36%
More – 20%
Less – 43%
Same – 37%
More – 15%
Less – 47%
Same – 38%
More – 19%
Less – 29%
Same – 52%
$283
$294
$257
$294
$281
$297
$210
$284
$229
Average corn/soybean rent/acre
Other Factors
•
•
•
•
•
•
•
•
Fertility and drainage
Size and shape of fields, % tillable
USDA program bases and yields
Local grain prices and basis
Seed production contracts
Manure application contracts
Longevity of lease
“Extras” done by tenant
Estimating a Cash Rental Rate
• Ag Decision Maker information file C2-20
• Decision Aid file C2-20 (spreadsheet)
Flexible Cash Leases
• Ag Decision Maker information file C2-21
• Decision Aid file C2-21 (spreadsheet)
Power Machinery Cost
and Investment Cost (Per Acre)
500
450
Mach & Power Investment
400
Mach & Power Cost
350
300
250
200
150
100
50
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Calculating Cash Rent
1.Market Cash Rent
Page County
Overall average
High Quality Third =
Middle Quality Third =
Low Quality Third =
$ 232
$ 293
$ 227
$ 176
Calculating Cash Rent
2 a. Average Rents Per Unit – Corn Yield
Page County
Determine Average Rent for Corn
Farm’s Average Corn Yield (bu/A)
X rent per bushel of Corn yield
= Average Rent for Corn Acre
147
$ 1.57
$ 231
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
Calculating Cash Rent
2 b. Average Rents Per Unit – Soybean Yield
Page 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
46
$ 5.10
$ 235
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
$ 231
$ 235
Average Rent Corn & Soybeans
$ 233
Using Corn Suitability Rating (CSR)
3. Average Rents Per CSR Index Point
Page County
Determine the Average Cash Rent using CSR
Farm’s Average Corn Suitability Rating
71
X rent per CSR index point
$3.27
= Rent for all Row Crop Acres
$ 232
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
Return on Investment Method
Page county farm estimated to have a market value of $6,558 per acre.
Expected Rent: (3.4%) X $6,558 / acre = $223 / acre
Overall Average
Average all 4 Methods (Page 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
Average
$230 /A X 125 Tillable Acres = $28,750
Split Payments of $14,375 and $14,375
$ 232
$ 231
$ 232
$ 223
$230/A
Additional Methods of
Farmland Lease Valuation
5. Gross Income Method
6. Tenant Residual Method
7. Crop Share Method
Share of Gross Income
CORN:
(147 bu X $5.91) + $22 = $ 891
SOYBEANS: (46 bu X $12.32) + $22 = $ 589
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:
$ 891/ ac x 23% = $ 205
SOYBEANS:
$ 589/ ac x 34% = $ 200
Average
$ 203
Tenant Residual Method
CORN:
$ 891 - $ 552 = $ 339
SOYBEAN:
$ 589 - $ 322 = $ 267
Average:
20% lower prices or yields
$ 303
$ 159
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
$261
Labor
$ 31
½ inputs
$185
½ inputs
$185
Machinery
$ 92
Management
$137
½ income
$445
½ income $445
Crop Share 50-50 Lease 2013
Landlord
Soybean
Tenant
Land
$213
Labor
$ 27
½ inputs
$ 82
½ inputs
$ 82
Machinery
$ 72
Management
$113
½ income
$294
½ income $294
Cash Rent Survey
Per Bushel Yield
Per CSR Point
Return on Investment
Gross Income
Tenant Residual
Crop Share
Average
Corn
Soybeans
$232
$231
$232
$223
$205
$339
$261
$232
$235
$232
$223
$200
$267
$213
$238
Thank You!
Tim Eggers
Field Ag Economist
(712) 303-7781
teggers@iastate.edu
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