Farmland Values and Leasing
Chapter 20
Key Questions
What determines the value of farmland?
What are the advantages and disadvantages of owning vs. leasing?
What are the common types of farm leases?
How can a fair cash rent be determined?
Characteristics of Farmland
Does not depreciate or wear out
Supply is fixed
Each parcel is unique
Values depend on profits from agriculture, other uses
Ownership provides security, pride
Land Value Trends in Iowa
1973-1981
Increased export demand
High grain prices
Low interest rates
High inflation rate
1982-1986
Higher interest rates
Lower inflation
Weather problems
Forced sales
1986-2001
Farm economic recovery
Government payments
Lower interest rates
2002-present
Improved yields, especially corn
Biofuels demand
Who Buys Iowa Farmland?
Farm for Sale
Key Questions in Analyzing a Land Purchase
Does it fit in with the operation?
Labor supply
Machinery
Livestock
Location
Is it worth the asking price?
Will the potential income support it?
How is it priced relative to the market?
Will the purchase cash flow?
Net Returns to LandCornSoybeans Average
Yield18050
Price$3.75$9.40
Gross income$666$470$568
Seed, fert, pest.280 160
Mach. Ownership 50 50
Mach. Operating 30 25
Drying 40 0
Labor 30 25
Total nonland costs$430$260$345
Property taxes, etc. 25
Total costs$370
Net return to land$198
Land Valuation:
Capitalization of Earnings
V = R / d
V = value of asset
R = expected annual earnings--$
d = discount rate
Discount Rate
Average cost of capital 7%
Minus expected inflation rate 3%
Equals discount rate (cap rate) 4%
Capitalized Land Value
Land value = $198 / .04 = $4,950 per acre
Adjust for % Tillable
Example:
75 acres tillable out of 80 =93.75%
$4,950 x 93.75% = $4,640 per tillable acre
Farmland values depend on:
Productivity (supply of crops)
Crop selling prices (demand)
Costs of production
Interest rates
Inflation rate
Alternative investments
Comparative Sales
Recent actual sales
Similar land
Same area
Recent Farmland Sales
Adjust for Productivity
CSR Rating
x $ per CSR point
= Estimated value
Example:
Comp. sales averaged $75 per CSR point
$75/ CSR point x 80 CSR = $6,000
x 93.75% tillable = $5,625
Comparative Sales
Factors to compare:
Productivity+ or -
Location+ or -
Other uses/income + or -
Family sales-
Sales contract+
Size of tract+ or -
Financial Analysis of a Land Purchase
Where can I obtain financing?
Equity (savings)
Credit: banks, Farm Credit Services
Installment contract
Will it cash flow?
On its own?
With help from other sources?
Cash Flow Analysis
Sale price
Down payment (30%)
Loan amount(2/3)
Amortization factor
(7%, 25 yr loan) (p.418)
Annual payment
Income available
Surplus/deficit
$5,000
-1,500
= $3,500
x
.0858
= $300
$198
$102
Maximum Loan that
will Cash Flow
$198 / .0858 = $2,308
Need about 50% down payment.
Or subsidize from other land that is paid for, livestock income, outside income.
Farmland Leasing in Iowa
Acres
Farmed by owner40%
Cash rent45%
Crop share rented13%
Custom farmed 2%
Own vs. Rent
Ownership
Security
Inflation hedge
Pride
Build equity
Loan collateral
Rental
Flexibility
Lower cash cost
No investment
Larger scale
Cash Leases
Tenant pays a fixed rate
Tenant takes all the risk
Rent may be due in advance
Most are one-year agreements
More management freedom
Fewer records to keep
Net Returns to LandCornSoybeans Average
Yield18050
Price$3.75$9.40
Gross income$666$470$568
Seed, fert, pest.280 160
Mach. Ownership 50 50
Mach. Operating30 25
Drying 40 0
Labor 30 25
Total nonland costs$430$260$345
Net return to land$223
Estimating a Fair Rent
Tenant’s Residual (max. to pay)
CornBeans
gross income$666$470
nonland costs- 430-260
=residual$236$210
Machinery fixed costs? $223
Labor?
USDA payments?
Estimating a Fair Rent
% of gross income
typically 30 to 40 % for corn
typically 40 to 50 % for beans
Corn: $666 x 35% = $233
Soybeans: $470 x 45% = $211
Average $222
Cash Rent Based on Yields
Corn: $1.00 - $1.20 per bushel
Soybeans: $3.50 - $4.00 per bu.
Example:
Corn: 180 bu. X $1.10 = $196
Soybeans: 50 bu. X $3.75 = $187.50
Flexible Cash Leases
Rent is paid in cash
Amount of rent depends on actual prices and/or yields
Tenant pays all crop expenses
Tenant and owner share risks
Must agree on how to calculate rent, and how to determine actual price and yield
Flexible Rent Example
Rent = % of Gross Revenue
Typical: 30-40%
(180 bu. @ $4.00) x 35% = $216
(120 bu. @ $4.50) x 35% = $189
(220 bu. @ $2.50) x 35% = $192
-May set a minimum and maximum rent.
Crop Share Leases
Tenant and owner divide crop
1/2 and 1/2 is typical
Tenant and owner share cost of crop inputs (seed, fertilizer, pesticides, drying, crop insurance)
Tenant supplies labor and machinery
Both price and production risk are shared
Less capital is required from tenant
Evaluating a Share Lease
CornTotalTenantOwner
Seed,fert,pest$280$140$140
Machinery 80 80 0
Drying 40 20 20
Labor 30 30 0
Management 33 33 0
(5% of gross $666)
Land$180 0$180
Total$643$303$340
Share 100%47% 53%
Developing a Good Lease
Discuss details and put it in writing
Treat the land as if it were your own
Communicate frequently
Consider environmental effects
Go the extra mile
The tenant that will pay the most is not always the best
Custom Farming
Operator supplies labor and machinery, only
May buy supplies, choose inputs, etc.
Receives a fixed payment, sometimes a bonus or % of crop
Owner takes all the risk
Contract Farming
Usually involves growing specialty crops
high oil corn, seed corn, organic grains, etc
May receive a fixed payment
May receive a guaranteed price
Must meet quality standards
Management requirements are stricter
May need separate storage
Need a guaranteed market
Contract
Finishing
Operator provides buildings, labor, operating costs
Contractor provides animals, feed, health services, marketing
Operator receives a fixed payment per animal or space. May have a bonus.
Limited risk, limited returns
Custom Feeding
(mostly cattle)
Operator supplies feedlot, labor, feed, and all operating expenses
Owner of cattle pays a yardage fee ($ per head per day) plus health costs, feed costs, transportation
Livestock Share
Lease
Crop costs split same as crop-share lease
Owner provide buildings, pasture, stationary equipment
Tenant provides movable equipment, labor
Divide livestock, feed, operating costs
Divide income equally
Not very common now