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Farmland Leasing Economics 333. Types of Rental Arrangements Cash Rent Flexible Cash Rent Crop Share 50-50Tenant & Landlord 67-33Tenant & Landlord Custom.

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Presentation on theme: "Farmland Leasing Economics 333. Types of Rental Arrangements Cash Rent Flexible Cash Rent Crop Share 50-50Tenant & Landlord 67-33Tenant & Landlord Custom."— Presentation transcript:

1 Farmland Leasing Economics 333

2 Types of Rental Arrangements Cash Rent Flexible Cash Rent Crop Share 50-50Tenant & Landlord 67-33Tenant & Landlord Custom Farming

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4 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

5 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

6 Location:Iowa County Acres280 acres Tillable Acres:264 Acres Corn Yield:179 bu/Acre Soybean Yield:54 bu/A Corn Suitability Rating:84 CSR Supporting Information

7 Expected Prices  Local forward contracting opportunities  Futures prices minus basis  Outlook information  Past averages  Example:Corn$3.75/bu Soybeans$8.60/bu

8 Expected Prices and Costs CornSoybeans Seed$100$57 Fertilizer + lime $119$97 Pesticides$35$30 Crop insurance $20$12 Interest + misc. $24$20 Fuel, repairs $31$21 Machinery own. $35$26 Drying, storage $23$0 Labor + mgmt. $46$39 Total$433$302

9 Cash Rent Market Approach Ag Decision Maker website Cash Rental Rates for Iowa 2010 Survey (file C2-10) Calculating Cash Rent Values

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11 1.Typical Cash Rent Select the Area of the State/County Area 6County Iowa Determine Overall average$193 High Quality Third =$ 224 Middle Quality Third =$ 195 Low Quality Third =$ 161 Calculating Cash Rent

12 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) 179 Times rent per bushel of Corn yield $ 1.13 Equals the Average Rent for Corn Acre $ 202 C. Expected Yield, Corn

13 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) 54 Times rent per bushel of Soybean yield $3.76 Equals the Average Rent for Soybean Acres $ 203 C. Expected Yield, Soybeans

14 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 D. Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

15 Web Soil Survey – Home

16 Leasing Opportunity Soil Type: Acres: Percent: CSR T370B % % 60 T % % 91 T % % % Totals % Iowa Corn Suitability Rating based yield estimation: 179 bushels per acre

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18 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

19 B. Tenant Residual Method CORN:$ $433 = $ 264 SOYBEAN: $ $302 = $ 187 Average: $ 225

20 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

21 Survey Average Rents per bushel Average Rents per CSR Index Point Percent of gross crop value Tenant’s residual What is a fair rent?

22 Flexible Cash Rent 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

23 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$3.84 Oct. 1$3.84 Nov. 1$3.74 Nov. 1$3.74 Dec. 1$3.70 Dec. 1$3.70 Average$3.76 Average$3.76  Rent = 185 bu. x $3.76 x 33% = $230

24 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

25 Crop Share Crop & Price risk are shared equally A second USDA payment limitation is created Crop Share Percentages 50-50Tenant & Landlord 67-33Tenant & Landlord Possible self employment tax for landlord

26 LandlordTenant Land ½ inputs Labor ½ inputs Machinery Management ½ income Crop Share Lease

27 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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