Farmland Purchase Analysis

Resources ISU Ag. Decision Maker; – Farmland Purchase analysis – Farmland values – Costs of production – Price assumptions – General update information USDA – FSA – ERS – Other Iowa ag. Development Authority Other

Financial Data Total acres Price per acre Percent down payment – This will vary depending on institution, credit condition, co-signer, security, etc. Amount of the loan (balloon) Interest rate – Current Fed. District average was 6.13 down from 6.41 a year ago

Financial Data Interest (cont) – Financial position – Terms – Remember beginning farmer loans; FSA, IADA, other; combining them Years and number of payments per year Current or desired rate of return on equity capital; how much do you want to earn; opportunity cost of your money Interest on operating money – 6.74 last quarter; 6.23 last year

Costs and returns data USDA payments; not as big as they used to be but still important; CRP and other long term type payments Annual income from other sources; animals, leases, building rents, etc. BE sure to include costs associated with the income Real estate taxes; quite a variation; Iowa tax based on productivity but it’s a really confusing formula; can’t go by CSR same county $24.40 for 85 CSR and $23.09 for 86 CSR. $25.92 for 81 CSR in another county. Average around $18 per acre

Costs and returns data Other annual ownership costs; fencing, tile, so forth Closing costs Expected increase in value over time (%) Percent rate of cash return on farmland; capitalization rate Initial investment needed for improvements Initial investment needed for extra machinery if needed

Costs and returns data Will land be rented, if so, how and how much Custom farmed; what is your share If you are farming it yourself- Anticipated crop rotation Number of acres of each crop; remember if you are having 100% corn, then 100% beans, etc. to account for all the acres over time. This is trickier the more crops you have and the longer the rotation

Costs and returns data Expected yield and variance; impact of alternative yield assumptions must be included Expected price and variance; same as with yield as far as evaluating a range of prices Other income; corn stover, grazing, etc. (remember costs) Nonland costs of crop production; seed, chemicals, fertilizer, machinery, etc. All the costs to put in the crop, except the land cost; be sure to include interest on borrowed operating funds

Analysis Step 1; – Estimate the gross revenue from the crop sales – Calculate gross income from all sources Step 2; – Calculate the crop production costs – Determine all the costs Step 3; – Estimate the cash net return to land

Analysis Estimated value based on typical return; – Step 3/capitalization rate Estimated value based on real cost of capital; – Step 3/(weight average cost of capital+annual increase in value) Return + capital gains. Where do capital gains come into play and how

Example 80 acres at $5000 an acre; $400,000 You have 35% down payment; $140,000 Finance the rest at 7% for 30 years with 1 payment per year; $20,952 per year Equity capital rate; 4% Assume govt and other income = 0 RE taxes; $20 or $1600/year Other ownership; $500 Closing costs; $1300

Average capitalization rate; 3.73% Assumed increase in land values; 4% (7% average since 1970) No new equipment needed, being charged average cost for use of equipment Corn/Soybean rotation (40 acres of each) with 170/50 bushel yield and $3.75 and $9.50 price Corn $418 non-land COP; $29 labor, $55 fixed machinery Soybeans $239 non-land COP; $27 and $36

Crop sales; $46,000 Crop expenses; $26,078 Other 2,100 Total non-land $27,178 Cash revenue $17,822 At 3.73% $477,802 or $5973 Wted cost of capital; (.35*.04)+(.65*.07) -.04 = 1.95% or $11,424 per acre Expected cash return; $17,872/$400K = 4.4% + 4% increase or not?

Cash flow $20,952 or $262/acre loan payment Leaves -$990 or per acre Most you could borrow; $3092/acre With 35% down; $4764; with same amount down $4846. Be sure to change your assumptions and see what happens.

Purchase Analysis Be realistic in your evaluation Remember that land ownership takes time; land tenure ladder Carefully evaluate alternative possibilities Get as much information as you can Make your decisions based on your circumstances, not someone else's