2. Farm Leasing Arrangements Tim Eggers Field Agricultural Economist teggers@iastate.edu 712-542-5171 www.extension.iastate.edu/feci

3. Agenda What Prices are Relevant? Trends in Farmland Values Farmland Leasing Practices DCP vs. ACRE Determining a "Fair" Cash Rental Rate Flexible Cash Leases Beginning Farmer Tax Credit General Farm Economy Who Pays Property Taxes

4. Tools ISU Extension Staff Resources Ag Decision Maker –Decision Aids Annual Surveys Publications –Decision Tools Agricultural Management e-School –Farm Leasing Arrangements course Non ISUE resources –SoilView –WebSoilSurvey

5. www.extension.iastate.edu/agdm

6. Hazards for 2010 Interest rate increases Asset value declines Below break-even crop insurance prices Missing the 2009 ACRE boat Missing the 2008 SURE boat

7. Power Mach Cost vs Invest. Cost (Per Acre) Low $96 Mid $76 High $72

8. Direct Corn Expenses

9. Direct Bean Expenses

10. 2010 Crop Cost Estimates - Corn Following Soybeans $594 $658 $722 $4.25/bu$4.11/bu$4.01/bu Cost per bushel Average Yield Low YieldMedium YieldHigh Yield

11. 2010 Crop Cost Estimates - Soybeans Following Corn Average Yield Low YieldMedium YieldHigh Yield $449 $487 $525 $9.97/bu$9.73/bu$9.55/bu Cost per bushel

12. 2010 Break Even Costs by Crop Rotation & Yield

13. December 2009 Corn Futures 2009 Rental Rate Decision Time

14. December 2010 Corn Futures Summer 2009

15. Corn Futures (don’t forget the 50 cent basis) $3.20 Dec 09 (August 2009) $6.40 Dec 09 (August 2008) $3.68 Dec 10 (August 2009)

16. November 2009 Soybeans 2009 Rental Rate Decision Time

17. November 2010 Soybeans Summer 2009

18. Soybean Futures (don’t forget the 90 cent basis) $10.91 Nov 09 (August 2009) $13.40 Nov 09 (August 2008) $9.30 Nov 10 (August 2009)

19. $3.20 $8.29 www.ufmcoop.com $4.11 $9.73

21. 23 fewer operational plants April 24, 2008 July 23, 2008 December 16, 2008 February 13, 2009 May 1, 2009 Not Producing1011193638 On Hold243348 Operational168186182165163 Planned320241224221217 Under Construction 7363461921 Cancelled171918

22. Iowa Farmland Value Surveys Iowa State University Extension –conducted annually around November 1st –mailed survey sent to 1,100 licensed real estate brokers –usually 500-600 responses –released in mid-December Federal Reserve Bank of Chicago –quarterly survey of ag lenders by state –http://www.chicagofed.org/economic_research_and_data/ag_letter.cfm Realtors Land Institute –semi-annual survey (March and September) –compares land classification by corn production –includes pasture and timber land –http://www.centralstatesland.com/csmlsdisplay.asp?id=ed01

23. Federal Reserve Bank of Chicago 2% increase April 2008 to April 2009 7% decrease January 2009 to April 2009

24. Iowa Farm & Land Chapter #2 Realtors Land Institute

26. Iowa State University Extension Land Value Survey November 2008 November 1, 2007 to November 1, 2008

27. Southwest $3,626 Up 13.0% Up $416 High $4,642 Medium$3,425 Low$2,298

28. Average Values All Grades 1950-2008

29. Percentage Change from Previous Year, 1951-2008

30. Percentage Change Adjusted for Inflation, 2008 Dollars 11%, 13%, 10% 1979, 1980, 1981

31. Who Purchased Farmland

32. 2008 Land Value Increases up to 12% 12.1% to 14% 14.1% to 16% 16.1% or more

33. Positive Factors Affecting Land Values

34. Negative Factors Affecting Land Values

36. .18.29

39. LandlordTenant Land ½ inputs Labor ½ inputs Machinery Management ½ income Crop Share 50-50 Lease

41. LandlordTenant Land $139 ½ inputs $164 Labor$ 29 ½ inputs$164 Machinery $ 66 Management$ 43 ½ income $303 Crop Share 50-50 LeaseCorn

42. LandlordTenant Land $ 99 ½ inputs$108 Labor$ 28 ½ inputs$108 Machinery$ 47 Management$ 24 ½ income$207 Crop Share 50-50 LeaseSoybeans

45. or How the Other 10% Live

46. 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

47. Improving Negotiation Skills Focus on win-win situations Introduce funny money Don’t underestimate your position at the bargaining table Formulate a resistance point

48. The “New” Farm Program  DCP same as before, Except:  2009-2012  83.3% instead of 85%  Payment limitations  Attribution  The ACRE option

49. ACRE Decision Points Choices: 1.Stay with current program 2.Enroll in ACRE in 2009 (August 14 deadline) 3.Enroll in ACRE in a later year

50. ACRE Option  1-4 years,  from enrollment to end of program  Once the farm is in ACRE, it stays in  until the program ends in 2012  Landowner and tenant must sign  If the tenant changes it stays in ACRE  If the land sells it stays in ACRE

51. ACRE characteristics  Based on loss of revenue (price x yield)  Benefits calculated state-wide (trigger 1)  State guarantee is recalculated each year  It can’t change by more than 10% each year  Must have revenue loss on farm (trigger 2)

52. ACRE vs. CCP Corn ACRE pays out No ACRE payments CCP pays No CCP payments

53. ACRE vs. CCP Soybeans ACRE pays out No ACRE payments CCP pays No CCP payments

55. Determining A “Fair” Cash Rent Value

56. Leasing Opportunity Soil Type: Acres: Percent: CSR ---------- -------- -------- ----- T370B 61.47 23.2% 85 248 17.72 6.7% 60 T368 16.70 6.3% 90 212 11.71 4.4% 91 T369 87.78 33.1% 85 133 9.69 3.7% 80 220 60.11 22.7% 85 ---------- -------- -------- ----- Totals 265.19 100.0% 83.73 Iowa Corn Suitability Rating based yield estimation: 179 bushels per acre

58. Location:Page County Tillable Acres:265 Acres Corn Yield:179 bu/Acre Soybean Yield:49 bu/A Corn Suitability Rating:84 CSR Supporting Information

59. Cash Rent Market Approach ISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2008 Survey (released in June) Three Methods for Determining Cash Rent Values Typical Cash Rent Average Rent for Production Average Rent for Corn Suitability Rating (CSR) Calculating Cash Rent Values

61. 1.Typical Cash Rent Select the Area of the State/County Area 10County Page Determine Overall average$ 159 High Quality Third =$ 184 Middle Quality Third =$ 159 Low Quality Third =$ 135 Calculating Cash Rent

62. 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 $ 1.05 Equals the Average Rent for Corn Acre $ 188 Calculating Cash Rent

63. 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) 49 Times rent per bushel of Soybean yield $ 3.39 Equals the Average Rent for Soybean Acres $166 Calculating Cash Rent

64. 2. Average Rents Per Unit – Corn & Soybeans Add the Average Rent for Both Corn Average Rent $ 188 Soybean Average Rent $ 166 Average Rent Corn & Soybeans$ 177 Calculating Cash Rent

65. 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 $ 2.16 Equals the Average Rent for all Row Crop Acres $ 181 Using Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

66. Average all 3 Methods Method 1: Typical Cash Rent $ 184 Method 2: Average Rents per Unit $ 171 Method 3: Average Rents per CSR Index Point $ 181 Average $181 /A $181/A X 265 Tillable Acres =$47,965 Split Payments of $23,983 and $23,982 Overall Average

67. Gross Income Method Tenant Residual Method Crop Share Method Return on Investment Method Cash Lease Calculations

68. Assumptions 265 crop acres 179 bushel corn yield 49 bushel Soybean yield Direct Government Payments –2002-07 average $22.00 / acre DCP change is 83.3% instead of 85% ($0.45 less) ACRE change is 20% less ($4.75 less) –plus the $0-159 ACRE payment if triggers are tripped

69. Share of Gross Income CORN:(179 bu X $3.20) + $22 = $595 SOYBEANS: (49 bu X $8.29) + $22 = $428 Iowa cash rents typically are equal to about 30 to 40 percent of the gross income from producing corn, and 35 to 45 percent of the gross income from producing soybeans. Cash Rental Rate CORN:$ 595/ac x 35% = $ 208 SOYBEANS:$ 428/ac x 40% = $ 171 Average $ 190

70. Tenant Residual Method CORN:$ 595 - $445 = $ 149 SOYBEAN: $ 428 - $304 = $ 124 Average: $ 137

71. Crop Share Method 50-50 Share Soybeans: 50% of gross minus owner’s costs $214 - $108 = $106 Average: $119 (1)The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime, pesticides, crop insurance, interest and miscellaneous, and drying and storage. Corn: 50% of gross minus owner’s costs $297 - $165 = $132

72. Expected Rent: (3.8%) X $4,500 / acre = $171 / acre

73. Cash Rent Survey Per Bushel Yield Per CSR Point Gross Income Tenant Residual Crop Share Return on Investment Average Corn Soybeans $184 $188$166$181 $208$171 $149$124 $132$106$171 $173$158 July 2009 $165 --- 30% decrease July 2008 $237 --- 27% increase July 2007 $186 --- 43% increase July 2006 $130

74. 61 CSR 164 Corn 45 Beans Crop Share $98.46 Tenant’s Residual $94.81

75. 58 CSR 160 Corn 44 Beans Crop Share $84.46 Tenant’s Residual $93.23

77. 49 CSR 137 Corn 34 Beans Crop Share $54.74 Tenant’s Residual $7.38

78. 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

79. 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

80. 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

81. < April 2007 cash lease, crop share lease, or scheme or device April 2007 – December 2008 Either a cash or a crop share lease > December 2008 Flexible cash leases are recognized as cash leases in federal register clarification of FCE 2008 A Flexible Cash Lease is a Cash Lease

84. Agricultural Asset Transfer Tax Credit Iowa Agricultural Development Authority 505 5th Avenue, Suite 327 Des Moines, Iowa 50309-2322 Ph: 515-281-6444 Fax: 515-281-8618 Email: iada@iowa.gov A Division of the Treasurer of the State of Iowa

85. State Income Tax Credits Non refundable Can carry unused credits forward 5 years No carry back

86. What Is An Ag Asset? Agricultural land Agricultural improvements Depreciable agricultural property –Breeding livestock –Machinery/Equipment Does not have to be traditional cow & plows.

87. Key Provisions Taxpayer Owner of record of the asset Eligible to own land under corporate farming laws Not at fault for terminating a prior lease Not a party to pending administrative or judicial action relating to violation of CAFO’s Not classified a habitual violator by DNR Can have more than 1 tax credit/lessee At fault termination, repay redeemed credits

88. Key Provisions Beginning Farmer Net worth less than $300,000 Have sufficient education, training and/or knowledge Have access to working capital Actively participate in management and labor of the operation and assume financial risk 18 years or older

89. Other Provisions Two – Five Year Lease Term Credit Good For Term of Lease Renewable at Expiration(with qualification) 5% of Gross Income = Cash Contract 15% of Gross Income = Commodity Share Agreement Lease value not substantially higher/lower than market

90. Other Provisions Began with 2007 tax year Cash or Crop Share Leases Related party transactions OK Can’t rent from owned entity “Rent to own” is not eligible

91. Other Provisions Leases Can Be Non-Traditional (if reasonable) Crop Share –Income determined by county average –Monthly average of county posted price –No Yield Monitors Submit FSA Form 156 –Documents Acres & Ownership

92. Application/Approval Procedures Obtain application from IADA –Taxpayer application –Beginning farmer application Submit applications & copy of lease to IADA Applications due 15 th of month Considered @ board mtg. (4 th Wednesday)

93. For Additional Information IOWA AGRICULTURAL DEVELOPMENT AUTHORITY 505 5 TH Ave., Suite 327 Des Moines, IA 50309 515/281-6444 iada@iowa.gov www.iada.state.ia.us

95. What the Records Show Make sure the data doesn’t get in the way of seeing the problem.

96. FINBIN Key Ratios Definition Liquidity Current RatioAbility to pay today’s bills Working Cap to Gross Available dollars to total revenue SolvencyDebt to Asset RatioOwed vs Owned Profitability (cost) ROAReturn on all assets ROEReturn on net worth RepaymentTerm Debt Coverage Ability to pay notes this year EfficiencyOper Expense Ratio % of total revenue used for operations

97. By Net Farm Income 2008, Minnesota Crop Farms Low 20% Crop Farms High 20% Liquidity Current Ratio1.392.50 Working Cap to Gross22 %51 % SolvencyDebt to Asset Ratio52 %43 % Profitability (cost) ROA1 %18 % ROE-6 %26 % RepaymentTerm Debt Coverage0.94.7 EfficiencyOper Expense Ratio81 %59 %

98. By Age, Minnesota, 2008 Crop Farms <31 Yr Old Crop Farms 51-60 Yr Old Liquidity Current Ratio1.662.06 Working Cap to Gross26 %43 % SolvencyDebt to Asset Ratio64 %43 % Profitability (cost) ROA15 %12 % ROE27 %17 % RepaymentTerm Debt Coverage3.23.0 EfficiencyOper Expense Ratio68 %64 %

99. By Crop Acres, Minnesota, 2008 Crop Farms 251 – 1,000 A Crop Farms > 2,000 A Liquidity Current Ratio2.021.95 Working Cap to Gross40 % SolvencyDebt to Asset Ratio45 %48 % Profitability (cost) ROA12 %15 % ROE18 %23 % Repayment Term Debt Coverage2.93.8 EfficiencyOper Expense Ratio62 %65 %

100. FINBIN Key Ratios by Crop Acres, 2008, Minnesota Hog Farms < 100 Acres Hog Farms >100 Acres Liquidity Current Ratio0.961.67 Working Cap to Gross-1 %19 % SolvencyDebt to Asset Ratio71 %53 % Profitability (cost) ROA-13 %1 % ROE-62 %-4 % RepaymentTerm Debt Coverage-2.30.6 EfficiencyOper Expense Ratio105 %93 %

101. By Crop Acres, Minnesota Hog Farms < 100 Acres 2008 Hog Farms <100 Acres 2006 Liquidity Current Ratio0.961.77 Working Cap to Gross-1 %14 % SolvencyDebt to Asset Ratio71 %50 % Profitability (cost) ROA-13 %15 % ROE-62 %24 % RepaymentTerm Debt Coverage-2.32.2 EfficiencyOper Expense Ratio105 %87 %

102. By Crop Acres, 2008, Minnesota Dairy Farms < 100 Acres Dairy Farms > 100 Acres Liquidity Current Ratio1.361.82 Working Cap to Gross5 %14 % SolvencyDebt to Asset Ratio52 %47 % Profitability (cost) ROA12 %8 % ROE21 %11 % RepaymentTerm Debt Coverage1.91.7 EfficiencyOper Expense Ratio80 %76 %

103. By Gross Farm Income, 2008, Minnesota Beef Farms < $500,000 Beef Farms > $500,000 Liquidity Current Ratio1.781.50 Working Cap to Gross39%27 % SolvencyDebt to Asset Ratio42 %53 % Profitability (cost) ROA2 %9 % ROE-2 %13 % RepaymentTerm Debt Coverage1.12.4 EfficiencyOper Expense Ratio76 %

104. Iowa Property Taxes The Iowa property tax is primarily a tax on "real property," which is mostly land, buildings, structures, and other improvements that are constructed on or in the land, attached to the land, or placed upon a foundation. Typical improvements include a building, house or mobile home, fences, and paving. http://www.iowa.gov/tax/educate/78573.html

105. Following Five Classes are Assessed residential agricultural commercial industrial utilities/railroad [This class is assessed at the state level.]

108. How is property tax rate determined? 1. The value of property is established. 2. The assessments of all taxable properties are added together. 3. The Department examines total assessed values and equalizes them. A process called "equalization" is applied every two years. The "assessment limitation" or “rollback” is applied every year. 4. Budgets are established. 5. A tax rate is established. 6. Credits are subtracted.

109. Equalization In Step 3 above, the Iowa Department of Revenue is responsible for "equalizing" assessments every two years. The Department compares the assessors’ abstracts to a "sales assessment ratio study" it has completed independently of the assessors. If the assessment (by property class) is 5 percent or more above or below the sales ratio study, the Department increases or decreases the assessment. There is no sales ratio study for agricultural and industrial property. Equalization occurs on an entire class of property, not on an individual property. Also, equalization occurs on an assessing jurisdiction basis, not on a statewide basis. Equalization is important because it helps maintain equitable assessments among classes of property and among assessing jurisdictions. This contributes to a more fair distribution of state aid, such as aid to schools. It also helps to equally distribute the total tax burden within the area.

110. Rollbacks More than 20 years ago, residential property values were rising quickly. To help cushion the impact of high inflation, the Legislature passed an assessment limitation law called rollback. Increases in assessed values for residential and agricultural property are subject to this assessment limitation formula. If the statewide increase in values of homes and farms exceeds 4 percent due to revaluation, their values are "rolled back" so that the total increase statewide is 4 percent. Rollback is also available for industrial and commercial property when necessary. This does not mean that the assessment on your home will increase by only 4 percent. The rollback is applied on a class of property, not an individual property. This means that the statewide total taxable value can increase by only 4 percent due to revaluation.

111. Assessment Residential, commercial and industrial real estate assessed at 100 percent of market value Agricultural real estate assessed at 100 percent 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.

112. For further property tax information http://www.iowa.gov/tax/locgov/proptax120707.pdf www.iowa.gov/tax/taxlaw/PTC-Feb5-04.pps http://www.iowa.gov/tax/locgov/PolkCoRule.pdf http://www.iowa.gov/tax/educate/78573.html http://www.iowa.gov/tax/locgov/iowa-property- tax.htmlhttp://www.iowa.gov/tax/locgov/iowa-property- tax.html

113. Hazards for 2008 – July 2007 Lower crop insurance prices Higher input costs –rent, fuel, fertilizer, seed, machinery, and drying Yields –low or at insurance coverage levels Price –average or below break even Increased world supplies or low ethanol prices

114. Hazards for 2009 – July 2008 Economic Profits Hangover Lower Crop Insurance Prices Farm Bill implementation –ACRE confusion Estate and general tax issues to be addressed with new legislature in 2009

115. Other Resources Materials from this meeting –http://www.extension.iastate.edu/feci/Leasing/vflm.htmlhttp://www.extension.iastate.edu/feci/Leasing/vflm.html Online Courses – Ag Management e-School –http://www.extension.iastate.edu/ames Workshops, meetings, conferences –http://dbs.extension.iastate.edu/calendar/ Publications – rental survey, land value survey, etc. –http://www.extension.iastate.edu/pubs/ Articles and spreadsheets –http://www.extension.iastate.edu/agdm/ Private Consultation –http://www.extension.iastate.edu/ag/fsfm/fsfarmmg.html

116. 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 Lease Arrangements A.M.E.S. Agricultural Management e-school An ISU Extension Outreach Institute

117. A.M.E.S. Agricultural Management e-school An ISU Extension Outreach Institute Purchase Plan Land Value Trends Using Soils Information Appraisal Techniques Financing Considerations Feasibility of a Land Purchase Farmland Ownership

118. Thank You! Tim Eggers Field Ag Economist ISU Page County Extension 311 East Washington Clarinda, Iowa 51632 (712) 542-5171 teggers@iastate.edu www.extension.iastate.edu/feci

119. ISU Extension builds partnerships and provides research-based learning opportunities to improve quality of life in Iowa Our Mission We believe in... Quality Access Diversity Accountability