Iowa Farmland Values, Cash Rent Trends & 2012 Crop Cost Estimates Steven D. Johnson Farm & Ag Business Management Specialist (515) January 2012

Presentation Objectives Highlight the 2011 Iowa Farmland Value Survey Discuss the Variability in Farmland Values and Cash Rental Rates Compare Trends in Average Farmland Values to Average Cash Rental Rates Discuss How Flexible Cash Farm Leases Work Provide 2012 Crop Cost & Potential Margin Estimates Highlight 5 Farmland Leasing Strategies & 5 ISU Extension Web Site Resources

$6,708 per Acre up 32.5% up $1,644 Statewide Average Land Values Non-Inflation AdjustedAdjusted for Inflation Source: Duffy, 2011 Iowa Farmland Value Survey, Dec. 2011

Statewide Variation in Land Values

Source: Iowa Department of Ag, DNR, 2006

Source: Iowa Land Tenure Survey, Duffy, ISU

2011 Iowa Cash Rent Survey Source: Cash Rental Rates for Iowa – 2011 Survey, Edwards, May State Average: $214/A

Iowa Land Value & Cash Rental Rate Trends Source: Duffy & Edwards ISU Extension Economics, Dec 2011

Likely Trends for 2012 Cash rent rates increase Crop inputs and machinery costs increase Futures price volatility continues Profit margins become compressed as compared to 2010 and 2011 Many high fixed cash rents were negotiated prior to the drop in 2012 crop futures prices Risk management will become critical. Source: Johnson, ISU Extension, January 2012

Advantages of Flexible Cash Leases Landlord is guaranteed a base rent plus a potential bonus Bonus can reflect the farm’s yields times cash prices available at harvest (Gross Revenue) Gross Revenue minus the expenses (Base Gross Revenue + Base Rent ) times a % Tenant can reflect increasing crop costs in the Base Gross Revenue value Flex leases tend to be multi-year arrangements. Source: Johnson, ISU Extension, January 2012

Types of Flexible Cash Farm Leases Option A: Rent = % of Gross Revenue Option B : Rent = Base rent + Bonus Bonus = (Gross Revenue – Estimated Costs) x % Concept of “Profit Sharing” between Tenant and Landlord Uses Actual Farm Yields and New Crop Harvest Delivery Bids Source: Edwards, Flexible Farm Lease Agreements C2-21, Sept. 2011

Crop Value vs. Cash Rent ($/Acre) Source: Edwards, ISU Extension Economics, May 2011

10-year averages: corn 31%, soybeans 42% Source: Edwards, ISU Extension Economics, May 2011 Iowa Cash Rent as % of Crop Value 40% of Soybeans 30% of Corn

Setting the Base Gross Revenue Best to use the Farm’s costs if available (by crop rotation, tillage practice, etc.) Concern should tenant allocate extra expenses to a farm using a Flexible Cash Lease Consider using ISU Extension’s “Estimated Costs of Crop Production” (FM-1712) to reflect production and crop rotation ISU Extension Releases Annually each January: 2012 Estimates by Tillage, Rotation and Yield: –Corn following Corn: $558/A + Base Rent –Corn following Soybeans: $504/A + Base Rent –Soybeans following Corn: $288/A + Base Rent Source: Johnson, ISU Extension, January 2012

Other Flex Lease Considerations Assumes last-half Base Rent plus the Flexible Payment (Bonus) is paid Post- Harvest Actual Farm Yields (dry weight) uses APH crop insurance requirements New Crop Cash Bids at local elevator are averaged using a minimum of 4 time periods A Flexible Cash Lease can adjust annually to Farm’s actual yields times the average harvest prices available Base Gross Revenue adjusts annually based on the latest “Estimated Costs of Crop Production in Iowa” released in January. Source: Johnson, ISU Extension, January 2012

ISU Extension Farmland Resources ISU Ag Decision Maker Web Site – Whole Farm – Leasing –Rental Rate Surveys, Leasing Forms, Lease Agreements, Flexible Farm Leases: C2-21 Crops – Costs & Return –Estimated Costs of Crop Production: A1-20 By Crop, Rotation, Tillage Practice, Yield Expectation Source: Johnson, ISU Extension, January 2012

2012 Cost Estimates: Corn following Corn Source: Duffy, ISU Extension Economics, Jan Low YieldMedium YieldHigh Yield $738 $816 $888 $5.10 / bu.$4.94 / bu.$4.80 / bu. Break Even

2012 Margin Estimate: Corn following Corn Source: Duffy & Hart ISU, Extension Economics, Jan Machinery $108 Land $258 Inputs $417 Crop Value $866 = 165 bu/A X $5.25/bu Direct Pmt. $23 $816 $889 $73 Labor $33 Average Yield165 bu/A Cost per bushel $4.94 / bu

Source: Duffy, ISU Extension Economics, Jan Cost Estimates: Corn following Soybeans Low YieldMedium YieldHigh Yield $686 $762 $834 $4.29 / bu.$4.23 / bu.$4.17 / bu. Break Even

2012 Margin Estimate: Corn following Soybeans Machinery $101 Land $258 Inputs $373 Crop Value $945 = 180 bu/A X $5.25/bu Direct Pmt. $23 $762 $968 $206 Labor $30 Average Yield180 bu/A Cost per bushel $4.23 / bu Source: Duffy & Hart ISU, Extension Economics, Jan. 2012

Source: Duffy, ISU Extension Economics, Jan Cost Estimates: Soybeans following Corn Low YieldMedium YieldHigh Yield $498 $546 $592 $11.07 / bu.$10.92 / bu.$10.77 / bu. Break Even

2012 Margin Estimate: Soybeans following Corn Machinery $81 Land $258 Inputs $181 Crop Value $550 = 50 bu/A X $11/bu Direct Pmt. $23 $573 $27 Labor $26 $546 Average Yield50 bu/A Cost per bushel $10.92 / bu Source: Duffy & Hart, ISU Extension Economics, Jan. 2012

Consider a Flexible Cash Lease that Reflects Crop Revenues & Costs Create a “Win-Win” for both the Tenant & Landlord Crop Inputs & Machinery Costs to Increase 3% to 15% Crop Prices Likely Remain High, but Lower that the 2011 Average Prices 5 Strategies for 2012 Farm Leases Managing Margins & Risk Management will be Key Source: Johnson, ISU Extension, January 2012

5 ISU Extension Web Sites Ag Decision Maker – Iowa Land Value Surveys Ag Decision Maker – Farmland Leasing Ag Decision Maker – Production Cost Estimates CALT – Center for Agricultural Law & Taxation Polk County Extension Farm Management Source: Johnson, ISU Extension, January 2012