Lunch & Learn Farmland Leasing Update December 10, 2003 Craig Dobbins

Leases Used for Indiana Cropland Approximately 58.9% of Indiana farmland is leased Cash lease – 47.7% of leased acres Share lease – 20.0% of leased acres Cash/share – 24.4% of leased acres Adjustable cash lease – 5.9% of leased acres

What can I pay for cash rent? + Market Revenue + Government payments - Crop production costs - Machinery ownership - Labor and management = Residual for land

Rent = $125

Cash Rent

June Average Land Cash Rent - Reported (Nominal) & Adjusted for Inflation (Real)

Survey Conducted in June of each year Survey professionals in the farm real estate market – land brokers, appraisers, farm managers, ag lenders, FSA, extension educators, farm operators Ask people to report for top, average, and poor cropland Long-term average or typical corn yields Market value of bare cropland Market value of land which is moving into non-agricultural uses Bare cropland cash rent

Property Tax Reassessment Use value approach Estimates of income to land Net operating income ranged from $56 - $131 per acre Cash rent ranged from $88 - $102 per acre Capitalization rate Varied from 9.10% to 9.92% Based on average annual interest rate on agricultural real estate and production loans Land Value = Income to land ÷ cap rate Adjust for productivity based on corn yield Adjust for other factors such as flooding Process explained

Property Tax Reassessment Agricultural base rate of $1,050 per acre up from $495 per acre Tax bills are larger 20%, 25%, ?????? Will this cause cash rents to jump up? Will tenants be willing to pay more? What will the market support?

Crop-Share Lease Principles Remember the risk - return tradeoff The more risky alternative needs to provide higher average return For an equitable crop-share lease, parties share total returns in the same proportion as they contribute to production

Land Owner Contribution $141.25

Tennant Contribution

Crop-Share Lease Principles As new technologies are adopted, share arrangements need to be adjusted to reflect their impact on costs and returns Variable expenses which are yield increasing should be shared in the same percentage as the crop share

Cost Shares for Share- Lease, Central Illinois Percent Tenant’s Share of Costs (percent of leases) HalfAll Seed100%0% Nitrogen98%2% Bulk Fertilizer100%0% Lime92% Burndown & Pre- emergence Herbicides 92%6% Source: University of Illinois, 1998

Lease Terms in Share- Lease Source: University of Illinois, 1998 Percent Tenant’s Share of Costs (percent of leases) ApplicationHalfAll Nitrogen70%30% Bulk Fertilizer84%16% Lime90%10% Burndown & Pre- emergence Herbicides 73%27% Insecticide73%27%

Lease Terms in Share- Lease Portion of Costs Paid by Tenant (Percent of Responses Received) for Other Machinery NoneHalfAll Hired labor for harvest 5%14%81% Harvesting by tenant 1%9%90% Custom harvesting 7%27%66% Source: Iowa State University Extension, 1993

Lease principles Tenants and/or landowners should be compensated at the termination of the lease for the unexhausted portion of long-term investments

References Historical cash rent and land values from Purdue Land Value Survey – PAER Archive Estimated Indiana Crop Budgets - ID Indiana Cash Farm Lease EC-257

References Fixed and Flexible Cash Rental Arrangements for your Farm, NCR-75 Cash Farm Lease with Flexible Provisions form, NCR-76* Crop-share or Crop-share/Cash Farm Lease form, NCR-77* Crop-share or Crop-share/Cash Rental Arrangements for your Farm, NCR-105 Irrigation Crop-share or Crop-share/Cash Farm Lease form, NCR-106* Irrigation Crop-share and Cash Rental Arrangements for your Farm, NCR-148

References Estimating cash rents Crop-share lease terms