2. Agenda Trends in Farmland Values Trends in Farmland Leasing Trends Share Leases Exist Farm Leasing Relationships Determining a "Fair" Cash Rental Rate Flexible Cash Leases

3. Tools ISU Extension Staff Resources Ag Decision Maker –Decision Aids Annual Surveys Publications –Decision Tools Agricultural Management e-School –Farm Leasing Arrangements course Non ISUE resources –SoilView

4. December 2008 Corn Futures

5. December 2009 Corn Futures

6. November 2008 Soybean Futures

7. November 2009 Soybeans

9.  Current ethanol capacity: 141 plants, 8 billion gallons/year  Total capacity under construction and expansion: 5.4 billion gallons/year  59 new ethanol plants and 7 expansion projects underway U.S. Ethanol Industry  2.1 billion bushels of corn were used in producing fuel ethanol in 2006/2007 marketing year.  3.2-3.5 billion bushels of corn are expected to be used in producing fuel ethanol for 2007/2008 marketing year.

10. http://www.dtnethanolcenter.com/images/e0010039/ethanol_plants.html

11. +1 +24 +18 -79 -10

13.  Current biodiesel capacity: 171 plants, 2.24 billion gallons/year  Total capacity under construction and expansion: 1.23 billion gallons/year  60 new plants underway U.S. Biodiesel Industry  2.8 billion pounds of soybean oil was used in producing biodiesel in 2006/2007 marketing year.  3.8 billion pounds of soybean oil are expected to be used in producing biodiesel for 2007/2008 marketing year.

14. www.extension.iastate.edu/agdm

16. 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 Federal Reserve Bank of Chicago –quarterly survey of ag lenders by state –http://www.chicagofed.org/economic_research_and_data/ag_letter.cfm Realtors Land Institute –semi-annual survey (March and September) –compares land classification by corn production –includes pasture and timber land –http://www.centralstatesland.com/csmlsdisplay.asp?id=ed01

17. Recent Land Value Estimates Chicago Fed 17% increase April to April RLI 9.5% increase September to March

18. Average Values All Grades 1950-2007 Average Values All Grades 1950-2007

19. Percentage Changes Percentage Change Increased up to 20% Increased 20.1 to 22.5% Increased 22.6 to 25.0% Increased 25.1% or more

20. Percentage Change Adjusted for Inflation, 2007 Dollars

21. Positive Factors Affecting Land Values, 2003-2007

22. Who Purchased Farmland

23. Change in Sales Activity

25. .18.29

30. LandlordTenant Land ½ inputs Labor ½ inputs Machinery Management ½ income Crop Share 50-50 Lease

34. LandlordTenant Land $305 ½ inputs $199 Labor$ 29 ½ inputs$199 Machinery$107 Management$169 ½ income $504 Crop Share 50-50 LeaseCorn

35. LandlordTenant Land $192 ½ inputs$114 Labor$ 27 ½ inputs$114 Machinery$ 79 Management$ 85 ½ income$305 Crop Share 50-50 LeaseSoybeans

36. Increased Costs of Production Corn $73.50Seed $97.20Nitrogen $71.40Phosphate $39.60Potash Soybeans $37.20Seed $45.90Phosphate $61.20Potash

37. Power Mach Cost vs Invest. Cost (Per Acre) Low $96 Mid $76 High $72

38. Machinery costs Fixed costsVariable costs Depreciation Interest Storage Insurance Repairs Labor Fuel

44. Leasing Video 3 Interviews - 15 minutes (:24 - :38) –Young farmer –Established farmer –Father-Son farming operation

45. 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

47. Improving Negotiation Skills Focus on win-win situations Introduce funny money Don’t underestimate your position at the bargaining table Formulate a resistance point

49. Leasing Opportunity Soil Type: Acres: Percent: CSR ---------- -------- -------- ----- T370B 61.47 23.2% 85 248 17.72 6.7% 60 T368 16.70 6.3% 90 212 11.71 4.4% 91 T369 87.78 33.1% 85 133 9.69 3.7% 80 220 60.11 22.7% 85 ---------- -------- -------- ----- Totals 265.19 100.0% 83.73 Iowa Corn Suitability Rating based yield estimation: 179 bushels per acre

51. Determining A “Fair” Cash Rent Value

52. Location:Page County Tillable Acres:265 Acres Corn Yield:179 bu/Acre Soybean Yield:49 bu/A Corn Suitability Rating:84 CSR Supporting Information

53. Cash Rent Market Approach ISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2008 Survey (released in June) 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

55. 1.Typical Cash Rent Select the Area of the State/County Area 10County Page Determine Overall average$ 160 High Quality Third =$ 196 Middle Quality Third =$ 158 Low Quality Third =$ 125 Calculating Cash Rent

56. 2 a.Average Rents Per Unit – Corn Yield Select the Area of the State/County Determine Average Rent for Corn Farm’s Average Corn Yield (bu/A) 179 Times rent per bushel of Corn yield $ 1.02 Equals the Average Rent for Corn Acre $ 183 Calculating Cash Rent

57. 2 b.Average Rents Per Unit – Soybean Yield Select the Area of the State/County Determine Average Rent for Soybeans Farm’s Average Soybean Yield (bu/A) 49 Times rent per bushel of Soybean yield $ 3.38 Equals the Average Rent for Soybean Acres $166 Calculating Cash Rent

58. 2. Average Rents Per Unit – Corn & Soybeans Add the Average Rent for Both Corn Average Rent $ 183 Soybean Average Rent $ 166 Average Rent Corn & Soybeans$ 174 Calculating Cash Rent

59. 3.Average Rents Per CSR Index Point Select the Area of the State/County Determine the Average Cash Rent using CSR Farm’s Average Corn Suitability Rating 84 Times rent per CSR index point $ 2.07 Equals the Average Rent for all Row Crop Acres $ 174 Using Corn Suitability Rating (CSR) Source: ISU Extension Publication FM- 1851

60. Average all 3 Methods Method 1: Typical Cash Rent $ 196 Method 2: Average Rents per Unit $ 174 Method 3: Average Rents per CSR Index Point $ 174 Average $181 /A $181/A X 265 Tillable Acres =$47,965 Split Payments of $23,983 and $23,982 Overall Average

62. Gross Income Method Tenant Residual Method Crop Share Method Return on Investment Method Cash Lease Calculations

63. Assumptions 265 crop acres 179 bushel corn yield 49 bushel Soybean yield Direct Government Payments –2002-07 average $22.00 / acre DCP no change ACRE change

64. Harvest Price Projections DateCorn PriceSoybean Price Today Dec 09 - $0.50 Nov 09 - $1.20 $5.90$12.23 last week$5.70$11.61 early August$4.98$10.54 mid July$5.51$12.02 early July$6.02$13.54 June$6.43$13.01 April 2008$5.65$11.50 July 2007 Dec 08 - $0.50 Nov 08 - $0.50 $3.50$8.70

65. Direct Corn Expenses

66. Direct Bean Expenses

68. Share of Gross Income CORN:(179 bu X $5.51) + $22 = $1,008 SOYBEANS: (49 bu X $12.02) + $22 = $611 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 CORN:$1,008/ac x 35% = $353 SOYBEANS:$ 611/ac x 40% = $275 Average $ 314

69. Tenant Residual Method CORN:$1,008 - $561 = $447 SOYBEAN: $ 611 - $349 = $262 Average:$355 25% lower prices or lower yield$158 20% lower prices or lower yield $197

70. Crop Share Method 50-50 Share Soybeans: 50% of gross minus owner’s costs $305 - $114 = $192 Average: $244 (1)The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime, pesticides, crop insurance, interest and miscellaneous, and drying and storage. Corn: 50% of gross minus owner’s costs $504 - $199 = $305

71. Return on Investment Method Iowa farm estimated to have a market value of $5,000 per acre. Expected Rent: (4%) X $5,000 / acre = $200 / acre 5.66%

72. Cash Rent Survey Per Bushel Yield Per CSR Point Gross Income Tenant Residual Crop Share Return on Investment Average Corn Soybeans $196 $183$166$174 $353$275 $447$262 $305$192$200 $265$209 July 2008 Average $237 --- 27% increase July 2007 $186 --- 43% increase July 2006 $130

73. Cash Rent Survey Per Bushel Yield Per CSR Point Gross Income Tenant Residual Crop Share Return on Investment Average Corn Soybeans $196 $183$166$174 $227$202 $88$99 $125$111$200 $170$164 July 2008 @ $3.50 and $8.70 $167 --- 10% decrease July 2007 $186 --- 43% increase July 2006 $130

74. or How the Other 10% Live

75. Flexible Cash Leases Desire: 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

76. 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

77. 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

78. 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.

79. 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

80. 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.

83. Hazards for 2008 – July 2007 Lower crop insurance prices Higher input costs –rent, fuel, fertilizer, seed, machinery, and drying Yields –low or at insurance coverage levels Price –average or below break even Increased world supplies or low ethanol prices

84. Hazards for 2008/09 – July 2008 Economic Profits Yields –low or at insurance coverage levels due to delayed planting Price –$4.14 and $9.19 new break even prices Food vs. Fuel debate –increased popular press discussion & ethanol plants coming online Farm Bill implementation –ACRE confusion Estate and general tax issues to be addressed with new legislature in 2009

85. Other Resources Materials from this meeting –http://www.extension.iastate.edu/feci/Leasing/vflm.htmlhttp://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

86. 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

87. A.M.E.S. Agricultural Management e-school An ISU Extension Outreach Institute Purchase Plan Land Value Trends Using Soils Information Appraisal Techniques Financing Considerations Feasibility of a Land Purchase Farmland Ownership

88. Thank You! Tim Eggers Field Ag Economist ISU Page County Extension 311 East Washington Clarinda, Iowa 51632 (712) 542-5171 teggers@iastate.edu www.extension.iastate.edu/feci

89. ISU Extension builds partnerships and provides research-based learning opportunities to improve quality of life in Iowa Our Mission We believe in... Quality Access Diversity Accountability