Farmland Leasing Arrangements Craig Chase, Field Specialist Farm & Ag Business Management

Session Topics Land Values Cash Rental Rates Leasing Practices Crop-Share Leases Calculating a Cash Rent Lease Flexible Cash Leases

Background Land values have been increasing for the past several years. Record levels for each of the past 4 years. Increases fueled primarily by poor overall economy, low interest rates and attractiveness of land investment. Investors were more important in the market the past several years.

Background Bioeconomy has created a boom in the land market since last fall. Land value increases are continuing at a rapid rate. Existing farmers are becoming more active participants. Land has increased 73% since 2000.

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 – Realtors Land Institute –semi-annual survey (March and September) –compares land classification by corn production –includes pasture and timber land –

Positive Factors Affecting Land Values,

Recent Land Value Estimates Chicago Fed reported a 7% increase in the 1 st quarter and a 16% increase April to April for the 7 th District. Iowa Chapter of Realtors Land Institute reported a 13.6% increase from September to March. ISU Soil Management Conference participants estimated a 20% increase from Nov. to Nov. 6% increase from Nov. 07 to Nov. 08.

Factors to Watch Overall performance of the economy, especially interest rates. Recreational demand. Performance of the housing market. Aging farmland owners and what the second generation will do with the land.

Factors to Watch The bioeconomy, especially corn based ethanol. The government programs, new farm bill will be out this year; outcome for level and type of programs is unknown; more of the same but less of it; major cuts? Regional differences could be a major factor; Public sentiment.

Cash/Crop Share/Owner Operator

Leasing Practices

Crop Share Practices

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

LandlordTenant Land $180 ½ inputs$ 90 Labor$ 28 ½ inputs$ 90 Machinery$ 57 Management$ 95 ½ income$270 Crop Share Lease

Quick Overview From the Owner’s perspective: –Which lease is least volatile from year to year? From the Tenant’s perspective: –Which lease is most volatile from year to year?

Determining A “Fair” Cash Rent Value

Location:Black Hawk County Tillable Acres:400 Acres Corn Yield:180 bu/Acre Soybean Yield:50 bu/A Corn Suitability Rating:80 CSR Supporting Information

Location:Delaware County Tillable Acres:400 Acres Corn Yield:180 bu/Acre Soybean Yield:50 bu/A Corn Suitability Rating:80 CSR Supporting Information

Location:Cerro Gordo County Tillable Acres:400 Acres Corn Yield:180 bu/Acre Soybean Yield:50 bu/A Corn Suitability Rating:80 CSR Supporting Information

Cash Rent Market Approach ISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2007 Survey (released in May) 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

1.Typical Cash Rent Select the Area of the State/County Area 8County Black Hawk Determine Overall average$ 185 High Quality Third =$ 208 Middle Quality Third =$ 181 Low Quality Third =$ 159 Calculating Cash Rent

1.Typical Cash Rent Select the Area of the State/County Area 9County Delaware Determine Overall average$ 176 High Quality Third =$ 207 Middle Quality Third =$ 172 Low Quality Third =$ 139 Calculating Cash Rent

1.Typical Cash Rent Select the Area of the State/County Area 3County Cerro Gordo Determine Overall average$ 162 High Quality Third =$ 191 Middle Quality Third =$ 163 Low Quality Third =$ 132 Calculating Cash Rent

2 a.Average Rents Per Unit – Corn Yield Select the Area of the State/County – Black Hawk Determine Average Rent for Corn Farm’s Average Corn Yield (bu/A) 180 Times rent per bushel of Corn yield $ 1.14 Equals the Average Rent for Corn Acre $ 205 Calculating Cash Rent

2 a.Average Rents Per Unit – Corn Yield Select the Area of the State/County – Delaware Determine Average Rent for Corn Farm’s Average Corn Yield (bu/A) 180 Times rent per bushel of Corn yield $ 1.07 Equals the Average Rent for Corn Acre $ 193 Calculating Cash Rent

2 a.Average Rents Per Unit – Corn Yield Select the Area of the State/County – Cerro Gordo Determine Average Rent for Corn Farm’s Average Corn Yield (bu/A) 180 Times rent per bushel of Corn yield $ 1.02 Equals the Average Rent for Corn Acre $ 184 Calculating Cash Rent

2 b.Average Rents Per Unit – Soybean Yield Select the Area of the State/County – Black Hawk Determine Average Rent for Soybeans Farm’s Average Soybean Yield (bu/A) 50 Times rent per bushel of Soybean yield $3.87 Equals the Average Rent for Soybean Acres $ 194 Calculating Cash Rent

2 b.Average Rents Per Unit – Soybean Yield Select the Area of the State/County – Delaware Determine Average Rent for Soybeans Farm’s Average Soybean Yield (bu/A) 50 Times rent per bushel of Soybean yield $3.50 Equals the Average Rent for Soybean Acres $ 175 Calculating Cash Rent

2 b.Average Rents Per Unit – Soybean Yield Select the Area of the State/County – Cerro Gordo Determine Average Rent for Soybeans Farm’s Average Soybean Yield (bu/A) 50 Times rent per bushel of Soybean yield $3.64 Equals the Average Rent for Soybean Acres $ 182 Calculating Cash Rent

2. Average Rents Per Unit – Corn & Soybeans Add the Average Rent for Both – Black Hawk Corn Average Rent $ 205 Soybean Average Rent $ 194 Average Rent Corn & Soybeans$ 200 Calculating Cash Rent

2. Average Rents Per Unit – Corn & Soybeans Add the Average Rent for Both – Delaware Corn Average Rent $ 193 Soybean Average Rent $ 175 Average Rent Corn & Soybeans$ 184 Calculating Cash Rent

2. Average Rents Per Unit – Corn & Soybeans Add the Average Rent for Both – Cerro Gordo Corn Average Rent $ 184 Soybean Average Rent $ 182 Average Rent Corn & Soybeans$ 183 Calculating Cash Rent

3.Average Rents Per CSR Index Point Select the Area of the State/County – Black Hawk Determine the Average Cash Rent using CSR Farm’s Average Corn Suitability Rating 80 Times rent per CSR index point $2.31 Equals the Average Rent for all Row Crop Acres $ 185 Using Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

3.Average Rents Per CSR Index Point Select the Area of the State/County – Delaware Determine the Average Cash Rent using CSR Farm’s Average Corn Suitability Rating 80 Times rent per CSR index point $2.27 Equals the Average Rent for all Row Crop Acres $ 182 Using Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

3.Average Rents Per CSR Index Point Select the Area of the State/County – Cerro Gordo Determine the Average Cash Rent using CSR Farm’s Average Corn Suitability Rating 80 Times rent per CSR index point $2.07 Equals the Average Rent for all Row Crop Acres $ 166 Using Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

Leasing Opportunity Soil Type: Acres: Percent: CSR T370B % % 60 T % % 91 T % % % Totals % Iowa Corn Suitability Rating based yield estimation: 179 bushels per acre

Source: ISU Extension Publication FM Average all 3 Methods – Black Hawk Method 1: Typical Cash Rent$ 185 Method 2: Average Rents per Unit$ 200 Method 3: Average Rents per CSR Index Point $ 185 Total all Methods and divide by 3 $190 /A $190 /A X 400 Tillable Acres =$76,000 Overall Average

Source: ISU Extension Publication FM Average all 3 Methods – Delaware Method 1: Typical Cash Rent$ 176 Method 2: Average Rents per Unit$ 184 Method 3: Average Rents per CSR Index Point $ 182 Total all Methods and divide by 3 $181 /A $181 /A X 400 Tillable Acres =$72,400 Overall Average

Source: ISU Extension Publication FM Average all 3 Methods – Cerro Gordo Method 1: Typical Cash Rent$ 162 Method 2: Average Rents per Unit$ 183 Method 3: Average Rents per CSR Index Point $ 166 Total all Methods and divide by 3 $170 /A $170 /A X 400 Tillable Acres =$68,000 Overall Average

4. Gross Income Method 5. Tenant Residual Method 6. Crop Share Method 7. Return on Investment Method Cash Lease Calculations (a)Assumptions: 400 crop acres, 180 bushel corn yield, 50 bushel Soybean yield, (b)Corn Market Price $3.00 / bu, Soybean Market Price $7.50 / bu, (c)Direct Government Payments average $22.00 / acre

Share of Gross Income CORN:(180 bu X $3.00) + $22 = $ SOYBEANS:(50 bu X $7.50) + $22 = $ 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 4a. CORN:$562.00/ac X 35% = $ 197 4b. SOYBEANS:$397.00/ac x 40% = $ Average$ 178

Tenant Residual Method 5a. CORN: $562 – $339 = $223 5b. SOYBEAN: $397 - $187 = $ Average:$217 Costs: FM-1712 less land

Crop Share Method Share Expense: Corn: 50 % x $ = $ Soybeans: 50 % x $ = $56.50 Equivalent Rent: 6a. Corn: $ $ = $ b. Soybean: $ $56.50 = $ Average:$149 (1)The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime, pesticides, crop insurance, interest and miscellaneous, and drying. Income: Corn: 50 % x 562 = $ Soybeans: 50 % x $397 = $198.50

Return on Investment Method Iowa farm estimated to have a market value of $3,700 per acre. 7. Expected Rent: (5%) X $3,700 / acre = $185 / acre

1. Cash Rent Survey 2. Per Bushel Yield 3. Per CSR Point 4. Gross Income 5. Tenant Residual 6. Crop Share 7. Return on Investment Average Corn Soybeans All Average: $ Average:$157 24% increase $185 $205$194$185 $197$159 $223$210 $156$142$185 $209$180 Calculation Method Black Hawk

1. Cash Rent Survey 2. Per Bushel Yield 3. Per CSR Point 4. Gross Income 5. Tenant Residual 6. Crop Share 7. Return on Investment Average Corn Soybeans All Average: $ Average:$155 17% increase $176 $193$175$182 $197$159 $223$210 $156$142$185 $187$176 Calculation Method Delaware

1. Cash Rent Survey 2. Per Bushel Yield 3. Per CSR Point 4. Gross Income 5. Tenant Residual 6. Crop Share 7. Return on Investment Average Corn Soybeans All Average: $ Average:$146 21% increase $162 $184$182$166 $197$159 $223$210 $156$142$185 $182$172 Calculation Method Cerro Gordo

Future Consideration What are prices (income) going to be? –Ethanol impact – how long? –Shifts in what is grown – Global impact? What are inputs going to cost? –Higher oil, higher fertilizer costs. –Higher demand for seed, technology cost.

December 2007 Corn Futures

November 2007 Soybean Futures

December 2008 Corn Futures

November 2008 Soybean Futures

What Should the Cash Rent Be? Tenant’s Residual December Corn Share of Gross Crop Share November Soybeans

When did you run the numbers?

With these prices?

NortheastNorthwest Ethanol Plants lowhighaverageElevatorslowhighaverageElevators Oct Nov Dec Jan Feb Mar Apr May Jun

Capacity: 142% of 2006 Crop Iowa Corn Processing Plants, Current & Planned, 5/30/07 71 Potential Iowa Plants 11 Just across IA Borders

Total 11,693 mil. Bu.

Power Mach Cost vs Invest. Cost (Per Acre)

Direct Corn Expenses

Direct Bean Expenses

Flexible Cash Leases Desire: Stable and predictable rents. Current Reality: Prices and yields are very unpredictable. Potential 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

Flexible Cash Lease is a Share Lease Farm Service Agency says that if the actual rent depends on the farm yield, direct and counter cyclical payments must be shared with the landowner. Considered to be a “share” lease Does not apply to LDPs or marketing loan gains.

If the final rent does not depend on the farm yield, a flexible rent is still considered to be a cash rent. Example: base rent on county average yield and actual price at harvest. County yields are not published until March each year. Flexible Cash Lease is a Cash Lease

Base plus Bonus Paying a “flex bonus” when revenue is above expectations does not affect the split of payments if it is not based on the actual farm yield. Provide a copy of your agreement to the FSA county office.

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

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

Questions….. Any questions or comments? Thank You for This Opportunity! Craig A. Chase Farm Management Field Specialist th Avenue SW Tripoli, IA (319)