Farm Leasing Arrangements

Tim EggersField Agricultural Economist

teggers@iastate.edu

712-542-5171

www.extension.iastate.edu/feci

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

www.agmanager.info

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

www.agmanager.info

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.”

www.agmanager.info

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!

www.agmanager.info

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

www.agmanager.info

www.agmanager.info

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”

www.agmanager.info

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

www.agmanager.info

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– http://www.extension.iastate.edu/agdm/wholefarm/html/c2-70.html

• Federal Reserve Bank of Chicago– quarterly survey of ag lenders by state– http://www.chicagofed.org/digital_assets/publications/agletter/

2010_2014/may_2011.pdf

• Realtors Land Institute – semi-annual survey (March and September)– compares land classification by corn production– includes pasture and timber land– http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-75.pdf

SouthwestSouthwest

$4,325$4,325up 21.5%up 21.5%up $766up $766

high $5,335high $5,335med $4,140med $4,140low $2,868low $2,868

AVERAGE VALUESAVERAGE VALUESall grades 1950−2010

POSITIVE FACTORSPOSITIVE FACTORSaffecting land values

NEGATIVE FACTORSNEGATIVE FACTORSaffecting land values

WHO PURCHASEDWHO PURCHASEDfarmland

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

sales activity from previous yearCHANGE INCHANGE IN

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

August 2011 USDA NASS

$196 average cash rent3.5% rent/value

Land Bubble or LandmineAugust USDA World Agricultural Supply and Demand estimated the US corn crop at 12.91 billion bushels

Feed and residual use 4.9 38%

Ethanol use 5.1 39%

Interest RatesImpacted by exchange rates

Farm ProfitabilityDemand for food, fiber and fuel

Prime Interest Rate

Farm Profitability

“Economic profits” don’t last long in acompetitive market

“Economic profits” destroyed by:– Falling output prices due to increases in production– Increased costs

Production costsLand prices/rentsNumber 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

http://ortho.gis.iastate.edu/

http://websoilsurvey.nrcs.usda.gov/

http://www.google.com/earth/

Calculating CSRs

Ortho.gis

Landlord Tenant

Land

½ inputs

Labor

½ inputs

Machinery

Management

½ income ½ income

Crop Share 50-50 Lease

Percent of Crop Share Acres with Equal Division of Costs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Yield

Seed

Fertili

zer

Inse

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Herbic

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e

Custo

m F

ertili

zer A

pplic

ation

Custo

m P

estic

ide A

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Custo

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ing

Pe

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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 andInvestment Cost (Per Acre)

Direct Corn Expenses

Direct Bean Expenses

Fuel CostsAugust 9, 2011 Release

http://www.eia.doe.gov/emeu/steo/pub/contents.html

Price SummaryYear Percent Change

2009 2010 2011 2012 09-10 10-11 11-12WTI Crudea ($/barrel) 61.65 79.40 95.71 101 28.8 20.5 5.5Gasolineb ($/gal) 2.35 2.78 3.53 3.64 18.4 26.9 3.1Dieselc ($/gal) 2.46 2.99 3.83 3.96 21.5 28.0 3.4Natural Gasd ($/mcf) 12.12 11.18 11.22 11.93 -7.8 0.4 6.3a West Texas Intermediate. b Average regular pump price.c On-highway retail. d U.S. Residential average.

Page County Fair Cash Rent

Landlord Tenant

Land $301

½ inputs $185

Labor $ 31

½ inputs $185

Machinery $ 67

Management $ 60

½ income $472 ½ income $472

Profit $129

Crop Share 50-50 Lease Corn

Landlord Tenant

Land $225

½ inputs $91

Labor $ 27

½ inputs $ 91

Machinery $ 59

Management $ 60

½ income $314 ½ income $314

Profit $77

Crop Share 50-50 Lease Soybeans

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 Approachc2-10 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/PayingAverage YieldsCorn Suitability Rating (CSR)

2011 Iowa Cash Rent Survey

224 220223

227 226219

213 177 198

What Others are Charging/Paying

District 7 County 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) 151Times rent per bushel of Corn yield $ 1.39Equals the Average Rent for Corn Acre $ 210

Average Yields – SoybeansFind 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 YieldsAverage 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 71Times rent per CSR index point $ 2.95Equals the Average Rent for all Row Crop Acres

$ 209

Average of first three methods

What Others are Charging/Paying $ 210Average Yields $ 211Corn 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

AssumptionsDecember 2012 Corn minus 50 cents $ 6.09

November 2012 Soybeans minus 80 cents $12.58

140 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 acreExpected 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: $ 945 - $527 = $ 417

Soybeans: $ 629 - $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

$869

160 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 LeasesDesire:

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 IssuesMowing 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. 562.5AIn 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

http://www.iowa.gov/tax/educate/78573.html

Page County Land Values

Source Value

November 1 2009 ISUE Annual Survey (2010 was $3,816) $3,195

2010 Capitalized Value (2011 is $1,950) $1,035

2010 Taxable Value (2011 will depend on 4% allowable growth) $686

Are you willing to sell for the capitalized or taxable value?

Source Per Acre Per 40 Per QuarterSection

November 1 2009 ISUE Annual Survey $3,195 $127,800 $511,200

2010 Capitalized Value $1,035 $41,400 $165,600

2010 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 441.21 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 ParcelCapitalized Value $41,440

2009 Rollback * 0.6627143%

Taxable Value $27,443

Total Millage $27.2765 per $1,000

Total Property Tax $748.55

per acre $18.71

Page County Levies $/$1,000 40 acre example

General Basic $3.50 $96.05

General Supplemental $1.25038 $34.31

MH-DD Services $1.18722 $32.58

Rural Services Basic $2.63355 $72.27

Debt Service

Assessor $0.52213 $14.33

Agricultural Extension $0.25207 $ 6.92

State (Bruc & TB Erad) $0.0034 $ 0.09

Area College $0.8038 $22.06

Grant Township –

Shenandoah School District $16.80394 $461.15

Township $0.32001 $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

– http://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

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

www.extension.iastate.edu/ames

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

www.extension.iastate.edu/ames

Thank You!

Tim EggersField Ag Economist

(712) 303-7781teggers@iastate.edu

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