Land Auction: Year 750 parcels available, 100 acres eachLand is identical to present landEach parcel goes to the highest bidderMinimum bid is $2,500. $100 increments.Purchase can be financed for 25% down

payment, 25 years, 7% interest rateValue on balance sheet is purchase price

Farmland Values and LeasingChapter 20Key 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 outSupply is fixedEach parcel is uniqueValues depend on profits from

agriculture, other usesOwnership provides security, pride

Average Iowa Farmland Value--$/acre

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Inflation Adjusted Iowa Average Land Values in 2008 Dollars

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

Land Value Trends in Iowa1973-1981

Increased export demand High grain prices Low interest rates High inflation rate

1982-1986 Higher interest rates Lower inflation Weather problems Forced sales

1986-2001 Farm economic recovery Government payments Lower interest rates

2002-present Improved yields, especially corn Biofuels demand

Who Buys Iowa Farmland?

60%

34%

2%

4%

0% 20% 40% 60% 80%

ExistingFarmers

Investors

NewFarmers

Others

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 PurchaseDoes it fit in with the operation?

Labor supply Machinery Livestock Location

Is it worth the asking price? Will the potential income support it? How is it priced relative to the market?

Will the purchase cash flow?

Net Returns to Land Corn Soybeans Average

Yield 180 50Price $3.75 $9.40Gross income $666 $470 $568

Seed, fert, pest. 280 160Mach. Ownership 50 50Mach. Operating 30 25Drying 40 0Labor 30 25Total nonland costs $430 $260 $345Property taxes, etc. 25Total costs $370Net return to land $198

Land Valuation:Capitalization of Earnings

V = R / d

V = value of assetR = expected annual earnings--$d = discount rate

Discount RateAverage 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 production4. Interest rates5. Inflation rate6. Alternative investments

Comparative Sales

Recent actual salesSimilar landSame area

Recent Farmland Sales

$5,540

75 CSR

$74/pt

$6,413

75 CSR

$86/pt

$6,000

88 CSR

$68/pt

$6,450

85 CSR

$76/pt

Adjust for ProductivityCSR 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 SalesFactors 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? Equity (savings) Credit: banks, Farm Credit Services Installment contract

Will it cash flow? On its own? With help from other sources?

Cash Flow Analysis Sale priceDown payment (30%)Loan amount(2/3)Amortization factor (7%, 25 yr loan) (p.418)Annual paymentIncome availableSurplus/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

AcresFarmed by owner 40%Cash rent 45%Crop share rented 13%Custom farmed 2%

Own vs. Rent

OwnershipSecurityInflation hedgePrideBuild equityLoan collateral

RentalFlexibilityLower cash costNo investmentLarger scale

Cash LeasesTenant pays a fixed rateTenant takes all the riskRent may be due in advanceMost are one-year agreementsMore management freedomFewer records to keep

Net Returns to Land Corn Soybeans Average

Yield 180 50Price $3.75 $9.40Gross income $666 $470 $568

Seed, fert, pest. 280 160Mach. Ownership 50 50Mach. Operating 30 25Drying 40 0Labor 30 25Total nonland costs $430 $260 $345Net return to land $223

Estimating a Fair Rent

Tenant’s Residual (max. to pay)Corn Beans

gross income $666 $470 nonland costs - 430 -260 =residual $236 $210

Machinery fixed costs? $223 Labor?USDA payments?

Estimating a Fair Rent % of gross income

typically 30 to 40 % for corntypically 40 to 50 % for beans

Corn: $666 x 35% = $233

Soybeans: $470 x 45% = $211Average $222

Cash Rent Based on Yields

Corn: $1.00 - $1.20 per bushelSoybeans: $3.50 - $4.00 per bu.Example:

Corn: 180 bu. X $1.10 = $196Soybeans: 50 bu. X $3.75 =

$187.50

Flexible Cash Leases

Rent is paid in cashAmount of rent depends on actual

prices and/or yieldsTenant pays all crop expensesTenant and owner share risksMust agree on how to calculate rent,

and how to determine actual price and yield

Flexible Rent Example

Rent = % of Gross RevenueTypical: 30-40% (180 bu. @ $4.00) x 35% = $216(120 bu. @ $4.50) x 35% = $189(220 bu. @ $2.50) x 35% = $192

-May set a minimum and maximum rent.

Crop Share LeasesTenant and owner divide crop

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 machineryBoth price and production risk are

sharedLess capital is required from tenant

Evaluating a Share Lease

Corn Total TenantOwner

Seed,fert,pest $280 $140 $140Machinery 80 80 0Drying 40 20 20Labor 30 30 0Management 33 33 0 (5% of gross $666)

Land $180 0 $180Total $643 $303$340Share 100% 47% 53%

Net Returns to Tenant--Corn

(60)(40)(20)

020406080

100120140160180200220240

$ per acre Cash

Crop Share

Net Returns to Tenant--Soybeans

(20)

0

20

40

60

80

100

120

140

160

180

200

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

$ per acre

Cash

Crop Share

Developing a Good LeaseDiscuss details and put it in writingTreat the land as if it were your ownCommunicate frequentlyConsider environmental effectsGo the extra mileThe tenant that will pay the most is

not always the best

Custom FarmingOperator supplies labor

and machinery, onlyMay buy supplies,

choose inputs, etc.Receives a fixed

payment, sometimes a bonus or % of crop

Owner takes all the risk

Contract FarmingUsually involves growing specialty crops

high oil corn, seed corn, organic grains, etcMay receive a fixed paymentMay receive a guaranteed priceMust meet quality standardsManagement requirements are stricterMay need separate storageNeed 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 leaseOwner provide buildings, pasture,

stationary equipmentTenant provides movable equipment, laborDivide livestock, feed, operating costsDivide income equallyNot very common now

Returns to Iowa Farmland

-5%

0%

5%

10%

15%

20%

25%

30% Cash Rent

Change in Land Value,

Total Return to Land