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Farmland Purchase Analysis

Farmland Purchase Analysis. Resources. ISU Ag. Decision Maker; Farmland Purchase analysis Farmland values Costs of production Price assumptions General update information USDA FSA ERS Other Iowa ag . Development Authority Other. Financial Data. Total acres Price per acre

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Farmland Purchase Analysis

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  1. Farmland Purchase Analysis

  2. Resources • ISU Ag. Decision Maker; • Farmland Purchase analysis • Farmland values • Costs of production • Price assumptions • General update information • USDA • FSA • ERS • Other • Iowa ag. Development Authority • Other

  3. Financial Data • Total acres • Price per acre • Percent down payment • This will vary depending on institution, credit condition, co-signer, security, etc. • Amount of the loan (balloon) • Interest rate • Current Fed. District average was 6.13 down from 6.41 a year ago

  4. Financial Data • Interest (cont) • Financial position • Terms • Remember beginning farmer loans; FSA, IADA, other; combining them • Years and number of payments per year • Current or desired rate of return on equity capital; how much do you want to earn; opportunity cost of your money • Interest on operating money • 6.74 last quarter; 6.23 last year

  5. Costs and returns data • USDA payments; not as big as they used to be but still important; CRP and other long term type payments • Annual income from other sources; animals, leases, building rents, etc. BE sure to include costs associated with the income • Real estate taxes; quite a variation; Iowa tax based on productivity but it’s a really confusing formula; can’t go by CSR same county $24.40 for 85 CSR and $23.09 for 86 CSR. $25.92 for 81 CSR in another county. Average around $18 per acre

  6. Costs and returns data • Other annual ownership costs; fencing, tile, so forth • Closing costs • Expected increase in value over time (%) • Percent rate of cash return on farmland; capitalization rate • Initial investment needed for improvements • Initial investment needed for extra machinery if needed

  7. Costs and returns data • Will land be rented, if so, how and how much • Custom farmed; what is your share • If you are farming it yourself- • Anticipated crop rotation • Number of acres of each crop; remember if you are having 100% corn, then 100% beans, etc. to account for all the acres over time. This is trickier the more crops you have and the longer the rotation

  8. Costs and returns data • Expected yield and variance; impact of alternative yield assumptions must be included • Expected price and variance; same as with yield as far as evaluating a range of prices • Other income; corn stover, grazing, etc. (remember costs) • Nonland costs of crop production; seed, chemicals, fertilizer, machinery, etc. All the costs to put in the crop, except the land cost; be sure to include interest on borrowed operating funds

  9. Analysis • Step 1; • Estimate the gross revenue from the crop sales • Calculate gross income from all sources • Step 2; • Calculate the crop production costs • Determine all the costs • Step 3; • Estimate the cash net return to land

  10. Analysis • Estimated value based on typical return; • Step 3/capitalization rate • Estimated value based on real cost of capital; • Step 3/(weight average cost of capital+annual increase in value) • Return + capital gains. Where do capital gains come into play and how

  11. Example • 80 acres at $5000 an acre; $400,000 • You have 35% down payment; $140,000 • Finance the rest at 7% for 30 years with 1 payment per year; $20,952 per year • Equity capital rate; 4% • Assume govt and other income = 0 • RE taxes; $20 or $1600/year • Other ownership; $500 • Closing costs; $1300

  12. Average capitalization rate; 3.73% • Assumed increase in land values; 4% (7% average since 1970) • No new equipment needed, being charged average cost for use of equipment • Corn/Soybean rotation (40 acres of each) with 170/50 bushel yield and $3.75 and $9.50 price • Corn $418 non-land COP; $29 labor, $55 fixed machinery • Soybeans $239 non-land COP; $27 and $36

  13. Crop sales; $46,000 • Crop expenses; $26,078 • Other 2,100 • Total non-land $27,178 • Cash revenue $17,822 • At 3.73% $477,802 or $5973 • Wted cost of capital; (.35*.04)+(.65*.07) - .04 = 1.95% or $11,424 per acre • Expected cash return; $17,872/$400K = 4.4% • + 4% increase or not?

  14. Cash flow • $20,952 or $262/acre loan payment • Leaves -$990 or -12.81 per acre • Most you could borrow; $3092/acre • With 35% down; $4764; with same amount down $4846. • Be sure to change your assumptions and see what happens.

  15. Purchase Analysis • Be realistic in your evaluation • Remember that land ownership takes time; land tenure ladder • Carefully evaluate alternative possibilities • Get as much information as you can • Make your decisions based on your circumstances, not someone else's

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