Land Auction: Year 7 §50 parcels available, 100 acres each §Land is identical to present land §Each parcel goes to the highest bidder §Minimum bid is $2,500. $100 increments. §Purchase can be financed for 25% down payment, 25 years, 7% interest rate §Value on balance sheet is purchase price

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 § l Increased export demand l High grain prices l Low interest rates l High inflation rate § l Higher interest rates l Lower inflation l Weather problems l Forced sales

§ l Farm economic recovery l Government payments l Lower interest rates §2002-present l Improved yields, especially corn l Biofuels demand

Who Buys Iowa Farmland?

Farm for Sale §FOR SALE: 80 acres in Hamilton County, 75 acres tillable, Clarion-Webster soil type, CSR of 76 and 84. No buildings. Hard surfaced road. Contract available.

Key Questions in Analyzing a Land Purchase §Does it fit in with the operation? l Labor supply l Machinery l Livestock l Location §Is it worth the asking price? l Will the potential income support it? l 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 Mach. Ownership Mach. Operating Drying 40 0 Labor 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: 1.Productivity (supply of crops) 2.Crop selling prices (demand) 3.Costs of production 4.Interest rates 5.Inflation rate 6.Alternative investments

Comparative Sales §Recent actual sales §Similar land §Same area

§Recent Farmland Sales $5, CSR $74/pt $6, CSR $86/pt $6, CSR $68/pt $6, CSR $76/pt

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? l Equity (savings) l Credit: banks, Farm Credit Services l Installment contract §Will it cash flow? l On its own? l 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 Mach. Ownership Mach. Operating Drying 40 0 Labor 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 =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: $ $1.20 per bushel §Soybeans: $ $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 $4.00) x 35% = $216 (120 $4.50) x 35% = $189 (220 $2.50) x 35% = $192 -May set a minimum and maximum rent.

Crop Share Leases §Tenant and owner divide crop l 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 Corn TotalTenantOwner Seed,fert,pest$280$140$140 Machinery Drying Labor Management (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 l 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