Farm Leasing Arrangements Tim Eggers Field Agricultural Economist

Agenda Trends in Farmland Values Trends in Cash Rental Rates Determining a "Fair" Cash Rental Rate Property Tax Valuation

Rental Ethics – Our perceptions… Tenants have the information (power) Cash rents tend to rise over time Manna-from-heaven payments often should be shared Foot-in-door high rents often inappropriate Landowners need money just like tenants Landowners are sometimes unethical too Family situations often are the worst Ethical behavior more profitable in long run

Tenants have the power! Landowners often: –Are generations and geographically removed –Are technologically removed –Are old and easily taken advantage of –View the arrangement with a tenant as a long-term commitment handed down from their parents –Think that farming is a low-income business and so want to “do their part” in aiding it –Believe there are few potential tenants and so are beholden to the existing tenant Tenants take advantage of the situation –Unintentionally (may be poor managers) –Intentionally (“she never asked me to raise rent”) Only occasionally do we see a landowner taking advantage of a tenant

Cash rents rise over time Although cash rents do fall about 30% of the years, on average they rise 2-3% annually –Unusual to see a 3-year contract rate that shouldn’t be higher than the previous contract Landowners & tenants who see stable crop-share terms for years think that translates to stable cash rent –We see cash rental rates that haven’t changed for years and decades Landlord: “We didn’t know.” Tenant: “She never asked for a higher rent.” Cash rents fall 20% of the time in Iowa. On average they rise by 4%.

Foot-in-door high rental payments High rent payments on new contracts often are followed by stagnant rates for many years, which could be: –A) Tenant overbids to get land, then realizes he’s not profitable so rationalizes stagnant rents –B) Tenant uses this as a strategy to acquire land and pay lower-than-market rents over time This is the least ethical outcome of the two Some tenants who do this actually beg for lower rents in near future, realizing that landlords are reluctant to change tenants –This is really unethical!

Landowners need money too Tenants often make the argument that “she doesn’t need the money” –This is completely irrelevant! Admittedly, landowners sometimes foster this perception... which tends to change when investment- minded heirs acquire land being rented

Landowner ethics Landowners may use their land for non-ag purposes and yet expect the same rent –Utility poles, oil leases –Lease hunting Landowners think if they paid too much for land it should bring a higher rent –This is completely irrelevant! Landowners might demand certain farming practices yet expect market rent –e.g., no fertilizer; conventional tillage Landowners make demands on current tenants to “fix” problems of past tenants

Family situations often are the worst “Sweat-equity” parent-child relationships lead to unrealistic expectations across generations Family members have trouble believing their own parents, children, or siblings would cheat them –Backlash then goes overboard Family members often are “always around” and so the pain always resurfaces –Hard to “forget and move on”

Ethics is good long run economics Poor ethics results in high tenant turnover: –Increases cost of relationship establishment and monitoring –Reduces profit to the land (tenant makes short run decisions) Bad business leads to unethical behavior –Poor management causes “I deserve more” –Bad behavior is rationalized Good ethics should emerge because it is the “right thing to do,” not for the purpose of long-run profit-maximization

Iowa Farmland Value Surveys Iowa State University Extension –conducted annually around November 1st –mailed survey sent to 1,100 licensed real estate brokers –usually responses –released in mid-December – Federal Reserve Bank of Chicago –quarterly survey of ag lenders by state – _2014/may_2011.pdf Realtors Land Institute –semi-annual survey (March and September) –compares land classification by corn production –includes pasture and timber land –

Southwest $4,325 up 21.5% up $766 high $5,335 med $4,140 low $2,868

AVERAGE VALUES all grades 1950−2010

POSITIVE FACTORS affecting land values

NEGATIVE FACTORS affecting land values

WHO PURCHASED farmland

Estimates of average dollar value per acre by crop reporting districts as of Nov. 1, 2010 First line: high, medium, and low grade farmland values Second line: district averages Third line: average percent change since Nov. 1, 2009

sales activity from previous year CHANGE IN

Iowa Farm & Land Chapter #2 Realtors Land Institute March 2011

August 2011 USDA NASS $196 average cash rent 3.5% rent/value

Land Bubble or Landmine August USDA World Agricultural Supply and Demand estimated the US corn crop at billion bushels Feed and residual use 4.938% Ethanol use5.1 39% Interest Rates Impacted by exchange rates Farm Profitability Demand for food, fiber and fuel

Prime Interest Rate

Farm Profitability “Economic profits” don’t last long in a competitive market “Economic profits” destroyed by: – Falling output prices due to increases in production – Increased costs Production costs Land prices/rents Number of producers

Farm Profitability Can the world increase yields? –Traditional breeding –GMO –Drought tolerant, Insect tolerant, Frost tolerant –Water utilization Can we put more land into production? –Africa –FSU –Arid regions

Land Quality Sites

Calculating CSRs

Ortho.gis

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

Putting a Lease Together Determine the goals for each party –production with the highest potential return –fair return to each party –continuity of income year to year –minimize risk –improve communication skills Put the agreement in writing - Both parties should be accountable to the lease arrangements established

Determining A “Fair” Cash Rent Value

December 2012 Corn Futures

November 2012 Soybeans

Power Machinery Cost and Investment Cost (Per Acre)

Direct Corn Expenses

Direct Bean Expenses

Fuel Costs August 9, 2011 Release Price Summary YearPercent Change WTI Crude a ($/barrel) Gasoline b ($/gal) Diesel c ($/gal) Natural Gas d ($/mcf) a West Texas Intermediate. b Average regular pump price. c On-highway retail. d U.S. Residential average.

Page County Fair Cash Rent

LandlordTenant Land $301 ½ inputs $185 Labor $ 31 ½ inputs $185 Machinery $ 67 Management $ 60 ½ income $472 Profit $129 Crop Share LeaseCorn

LandlordTenant Land $225 ½ inputs$91 Labor $ 27 ½ inputs $ 91 Machinery $ 59 Management $ 60 ½ income$314 Profit $77 Crop Share LeaseSoybeans

Assumptions Location:Page County Tillable Acres:140 Acres Corn Yield:151 bu/Acre Soybean Yield:48 bu/A Corn Suitability Rating:71 CSR

Cash Rent Market Approach c2-10 Cash Rental Rates for Iowa 2011 Survey (released in June) Methods for Determining Cash Rent Values c2-20 Computing a Cropland Cash Rental Rate What Others are Charging/Paying Average Yields Corn Suitability Rating (CSR)

2011 Iowa Cash Rent Survey

What Others are Charging/Paying District 7County Page Determine Overall average$210 High Quality Third$ 269 Middle Quality Third $ 197 Low Quality Third $ 164

Average Yields – Corn Find the page with your Crop Reporting District and County Average Rents per 5 Year Average Yield or CSR Farm’s Average Corn Yield (bu/A) 151 Times rent per bushel of Corn yield $ 1.39 Equals the Average Rent for Corn Acre $ 210

Average Yields – Soybeans Find the page with your Crop Reporting District and County Average Rents per 5 Year Average Yield or CSR Farm’s Average Soybean Yield (bu/A) 48 Times rent per bushel of Soybean yield $4.40 Equals the Average Rent for Soybean Acres$ 211

Average Yields Average the two averages Corn Average Rent $ 210 Soybean Average Rent $ 211 Average Rent Corn & Soybeans$ 211

Corn Suitability Ratings (CSR) Find the page with your Crop Reporting District and County Average Rents per 5 Year Average Yield or CSR Farm’s Average Corn Suitability Rating 71 Times rent per CSR index point $ 2.95 Equals the Average Rent for all Row Crop Acres $ 209

Average of first three methods What Others are Charging/Paying$ 210 Average Yields$ 211 Corn Suitability Ratings$ 209 Average $210 /A $210/A X 140 Tillable Acres =$29,400 Split Payments of $14,700 and $14,700

Methods Requiring Additional Data Share of Gross Crop Revenue Return on Investment Crop Share Equivalent Tenant’s Residual

Assumptions December 2012 Corn minus 50 cents $ 6.09 November 2012 Soybeans minus 80 cents $ crop acres 151 bushel corn yield 48 bushel Soybean yield $25 per acre in Direct Payments 2012 Estimated Costs of Crop Production (2011 with additional information)

Share of Gross Crop Revenue Corn(151 bu X $6.09) + $25 = $945 Soybeans (48 bu X $12.58) + $25 = $629 CORN:$ 945/ac x 24% = $ 227 SOYBEANS:$ 629/ac x 35% = $ 220 Average $ 223

Return on Investment market value of $3,816 per acre Expected Rent: (3.4%) X $3,816/ acre = $130 / acre

Crop Share Equivalent 50% of gross minus owner’s costs Corn:$472 - $185 = $301 Soybeans:$314 - $91 = $225 Average$263

Tenant’s Residual Corn:$ $527 = $ 417 Soybeans: $ $332 = $ 297 Average: $ 357

Summary of Methods What Others are Charging/Paying$210 Average Yields$211 Corn Suitability Rating$209 Share of Gross Crop Revenue$223 Return on Investment$130 Crop Share Equivalent$263 Tenant’s Residual$357 Average$229

2012 Crop Costs Estimates - Corn following Soybeans $782 $796 $ bu. $4.51/bu 180 bu. $4.42/bu 200 bu. $4.35/bu

2012 Crop Cost Estimate - Soybeans 45 bu. $11.19/bu 50 bu. $10.97/bu 55 bu. $10.80/bu $503 $548 $594

Flexible Cash Leases Desire: Terminated tenants want cash rent leases to be renewed by September 1 for the following year Current Reality: Prices and yields are very unpredictable Solution: Flexible lease contract

Advantages Disadvantages Price and production risk shared as well as profit opportunities Actual rent adjusts as production or price change Owner does not have to be involved in decision making about inputs or marketing Owner and producer share in risks Not as well understood as traditional cash lease or crop share More difficult to calculate Owner benefits from tenant’s management skills Tenant loses windfall profit potential from high prices

Types of Flexible Cash Leases Rent varies with both price and yield –Matches tenant’s ability to pay Rent varies with yield only –Could have high yields, low prices Rent varies with price, only –Could have low yields, high prices

Legal Issues Mowing Road Ditches – House File 2458 Prohibits mowing before July 15 in the rights-of-way and medians of interstate highways, state highways and secondary roads. Applies to private property owners, the Iowa DOT, and counties. Right to mow grass that is along the road on the landowner’s land, as long as the mowing is done on or after July 15 and does not conflict with an integrated roadside vegetation management plan. Exceptions: mowing within 200 yards of your home, mowing for visibility and safety reasons, mowing around mailboxes, for other access purposes, and to establish control of damaging insects, noxious weeds or invasive plants.

Iowa Code Sec A In a farm tenancy, the tenant has the right to take part of a harvested crop’s above ground plant, such as corn stover and other crop residue. Tenant may take aboveground residue at the time of harvest or after harvest, until the termination of tenancy. It is important to remember that if the landlord and tenant specify another use or non use for the residue, in writing, then the writing will trump this new code section.

Property Tax Module

Page County Land Values SourceValue November ISUE Annual Survey (2010 was $3,816)$3, Capitalized Value (2011 is $1,950)$1, Taxable Value (2011 will depend on 4% allowable growth)$686

Are you willing to sell for the capitalized or taxable value? SourcePer AcrePer 40Per Quarter Section November ISUE Annual Survey$3,195$127,800$511, Capitalized Value$1,035$41,400$165, Taxable Value$686$27,440$109,760

Assessed based on productivity Agricultural real estate is assessed at 100% of productivity and net earning capacity value. The assessor considers the productivity and net earning capacity of the property. Agricultural income as reflected by production, prices, expenses, and various local conditions is taken into account

Iowa Code Actual, Assessed, and Taxable Value e. The actual value of agricultural property shall be determined on the basis of productivity and net earning capacity of the property determined on the basis of its use for agricultural purposes capitalized at a rate of seven percent and applied uniformly among counties and among classes of property. Any formula or method employed to determine productivity and net earning capacity of property shall be adopted in full by rule.

41 Determination Steps Crop Acres Crop Production Crop Yields Crop Prices Landlord Income Landlord Per Acre Expense Total Landlord Expense Fertilizer and Insurance Expense Total Expenses Income for Enumerated Acres Net Income Per Acre for Enumerated and Other Acres Total Net Landlord Income for Other Acres Total Net Income Net Income Per Acre Per Acre Real Estate Tax Per Acre Value

6 Worksheets Budget Worksheet Production Worksheet Government Programs Worksheet Average Prices Worksheet Drainage and Levee Taxes Worksheet Real Estate Taxes Worksheet

40 Acre Parcel Capitalized Value $41, Rollback* % Taxable Value $27,443 Total Millage $ per $1,000 Total Property Tax$ per acre$18.71

Page County Levies $/$1,00040 acre example General Basic$3.50$96.05 General Supplemental$ $34.31 MH-DD Services$ $32.58 Rural Services Basic$ $72.27 Debt Service Assessor$ $14.33 Agricultural Extension$ $ 6.92 State (Bruc & TB Erad)$0.0034$ 0.09 Area College$0.8038$22.06 Grant Township – Shenandoah School District$ $ Township$ $8.78

Hazards for 2012 Interest rate increases Price declines Below break-even crop insurance prices Increasing input prices - energy

Other Resources Materials from this meeting – Online Courses – Ag Management e-School – Workshops, meetings, conferences – Publications – rental survey, land value survey, etc. – Articles and spreadsheets – Private Consultation –

Objective: Land Leasing Confidence  Introduction to Farm Leases  Cash Rent Leases  Crop Share Leases  Custom Farming  Renting Buildings  Renting Hay and Pasture Land  Legal and Tax Considerations  Conservation and Environmental Considerations  USDA Agencies and Programs  Owner and Operator Relations Farm Leasing Arrangements Photo courtesy of USDA NRCS

Objective: Purchase Plan  Land Value Trends  Using Soils Information  Appraisal Techniques  Financing Considerations  Feasibility of a Land Purchase Farmland Ownership Photo courtesy of USDA NRCS

Thank You! Tim Eggers Field Ag Economist (712)

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