1. Land Rent – Base or Bubble? What is fair? What are my options?

2. Changing Rent Picture Higher price per bushel New level of yields Increased input costs Higher land values

3. Market prices While not at record levels, prices are at the upper levels of where they have been for a number of years. Is it a bubble or a new level? Maybe this one we can blame on ethanol

4. Corn % of Time Current $Price25 Yrs.15 Yrs.10 Yrs.5 Yrs. Current $ $ 3.500% $ 3.251%0% $ 3.007%3%4% $ 2.7513%9% 8% $ 2.5032%24%22%15% $ 2.2554%46%39% $ 2.0073% 61%65% $ 1.7586%91%86%98% $ 1.5092%95%92%100% $ 1.2593%95%92%100% $ 1.00100%

5. Soybeans % of Time Current $Price25 Yrs.15 Yrs.10 Yrs.5 Yrs. Current $ $ 9.001%0% $ 8.501%0.20%0.40%0% $ 8.004%3%5%2% $ 7.5012%8%12%7% $ 7.0020%17%22%11% $ 6.5029%28%34%20% $ 6.0047%42%41%30% $ 5.5072%70%56%50% $ 5.0085%80%70%68% $ 4.5093% 89% $ 4.0095%96%93%91% $ 3.50100%

6. Crop yields Before 2002 corn yields never above 170 bu per acre 2002 and after only once below 170 bu per acre The role of genetics New level or just good weather?

8. Input costs Higher oil costs affecting: –Fuel costs –Fertilizer costs –Chemical costs World Issues –China –Less competition Costs of new seed genetics

9. Land values Value of cropland increasing significantly Cash rents are going up How high can cash rents go?

10. What is fair? The Market Approach Landowner: Desired return Approach Renter: How much can I afford to pay Approach Flexible Cash Rent Approaches

11. Market Approach Cash Rent is going up double digit

12. Desired Return Approach Would like to have a 6% rate of return on investment –$4,500 X 6% = $270 –Rates have fallen from 6% in middle 90’s to 3.5 – 4.0% today

13. Desired Return Approach Real Estate Value Increase Cash Rent Increase 2003-200773.8%14.7% 2006-200715.8%6.8% 2005-200614.3%1.7% 2004-200516.7%3.6% Source: Land Values and Cash Rents 2007 Summary, NASS, USDA

14. Fair Rent costs Crop Corn Soybeans Acres 500.00 500.00 Expected yield 170.00 bu. 45.00 bu. Expected price 3.20 8.75 Transition payments - - Other income 18.00 18.00 Gross return 562.00 411.75

15. Fair Rent Costs Direct expenses Corn Soybeans Seed 78.00 39.00 Fertilizer 96.00 15.00 Chemicals 20.00 20.00 Crop insurance 18.00 18.00 Drying 20.00 - Custom hire - - Direct crop labor - - Fuel 25.00 20.00 Repairs 35.00 30.00 Other direct expense 20.00 20.00 Operating interest 10.00 8.50 Interest on rent 10.00 10.00 Total 332.00 180.50 Overhead expenses 40.00 40.00 Operator labor & mgt. 30.00 30.00 Total listed costs 402.00 250.50

16. Sensitivity tables 20 % 10 % Expected 10 % 20 % Lower Lower Yields Higher Higher Income Income & Prices Income Income --------- -------- --------- --------- -------- To cover direct expenses $137 184 231 278 324 To cover direct & overhead expenses 97 144 191 238 284 To cover labor & mgt (all costs)67 114 161 208 254

17. Sensitivity Table Income Remaining For Cash Rent Per Acre: Corn Price Yield Per Acre Per bu. 136.0 153.0 170.0 187.0 204.0 ------- -------- ------- -------- ------- 2.56 $-36 8 51 95 138 2.88 8 57 106 155 204 3.20 51 106 160 214 269 3.52 95 155 214 274 334 3.84 138 204 269 334 399

18. Sensitivity Table Income Remaining For Cash Rent Per Acre: Soybeans Price Yield Per Acre Per bu. 36.0 40.5 45.0 49.5 54.0 ------- ------- -------- -------- -------- 7.00 20 51 83 114 146 7.88 51 86 122 157 193 8.75 83 122 161 201 240 9.63 114 157 201 244 287 10.50 146 193 240 287 335

19. Sensitivity Table Income Remaining For Cash Rent Per Acre: Average of All Crops Yield Per Acre Price - 20 % - 10 % Expected + 10 % + 20 % ------- -------- ---------- --------- --------- - 20 % -8 29 67 104 142 - 10 % 29 72 114 156 198 Expected 67 114 161 208 254 + 10 % 104 156 208 259 311 + 20 % 142 198 254 311 367

20. Selecting a Land Rental Agreement Weather and Price Risk Assumed Degree of Landowner Involvement Capital required Management Involvement Marketing Responsibility Variability in Returns

21. Factors Influencing Rental Value of a Farm Location of Farm –Crops Grown/Markets available –Supply and Demand of Rented Land Productivity of Farm –Soil Type –Drainage –Fertility Level

22. Factors Influencing Rental Value of a Farm Size of Fields Previous crops grown and chemicals used FSA Base and Yield Building availability and use Payment provisions –Total/Tillable/Harvestable Acres –Payment Dates

23. What are my options Cash Rent Share Rent Flexible Rent

24. Flexible Rent Options Base Rent plus Bonus Flex for Price Flex for Yield Flex for Combination Be aware of FSA rules regarding flexible leases viewed as share rent

25. Why some farmers are willing to pay higher rents Produce higher return crops Expect higher yields than average Expect higher price than average Lower production costs Averaging land costs Willing to work for less money Live off depreciation Previous rent history with landlord

26. Earn the right to rent Communicate Be honest Be respectful of landlord wishes Do the little things Sacrifice quick profit for long-term prospect of renting more land Practice give and take – win some, lose some

27. Put your agreement into writing Encourages detailed statement of things agreed upon Serves as a reminder of things agreed upon in you have problems Guide to heirs if farm operator or landlord dies

28. Essential Provisions of written lease Name and addresses of participants Period of agreement/renewal/cancellation Description of property Payments: amounts and when Signatures

29. Land Rent – Base or Bubble?? Maybe some of both Thank you Peter Scheffert Riverland Community College 507-649-1347 peter.scheffert@riverland.edu