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Land Auction: Year 7

Land Auction: Year 7. 50 parcels available, 100 acres each Land is identical to present land Each parcel goes to the highest bidder Minimum bid is $2,500. $100 increments. Purchase can be financed for 25% down payment, 25 years, 7% interest rate Value on balance sheet is purchase price.

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Land Auction: Year 7

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  1. Land Auction: Year 7 50 parcels available, 100 acres each Land is identical to present land Each parcel goes to the highest bidder Minimum bid is $2,500. $100 increments. Purchase can be financed for 25% down payment, 25 years, 7% interest rate Value on balance sheet is purchase price

  2. Farmland Values and LeasingChapter 20Key Questions • What determines the value of farmland? • What are the advantages and disadvantages of owning vs. leasing? • What are the common types of farm leases? • How can a fair cash rent be determined?

  3. Characteristics of Farmland • Does not depreciate or wear out • Supply is fixed • Each parcel is unique • Values depend on profits from agriculture, other uses • Ownership provides security, pride

  4. Land Value Trends in Iowa • 1973-1981 • Increased export demand • High grain prices • Low interest rates • High inflation rate • 1982-1986 • Higher interest rates • Lower inflation • Weather problems • Forced sales

  5. 1986-2001 • Farm economic recovery • Government payments • Lower interest rates • 2002-present • Improved yields, especially corn • Biofuels demand

  6. Who Buys Iowa Farmland?

  7. Farm for Sale • FOR SALE: 80 acres in Hamilton County, 75 acres tillable, Clarion-Webster soil type, CSR of 76 and 84. No buildings. Hard surfaced road. Contract available.

  8. Key Questions in Analyzing a Land Purchase • Does it fit in with the operation? • Labor supply • Machinery • Livestock • Location • Is it worth the asking price? • Will the potential income support it? • How is it priced relative to the market? • Will the purchase cash flow?

  9. Net Returns to Land CornSoybeans Average Yield 180 50 Price $3.75 $9.40 Gross income $666 $470 $568 Seed, fert, pest. 280 160 Mach. Ownership 50 50 Mach. Operating 30 25 Drying 40 0 Labor 3025 Total nonland costs $430 $260 $345 Property taxes, etc. 25 Total costs $370 Net return to land $198

  10. V = R / d V = value of asset R = expected annual earnings--$ d = discount rate Discount Rate Average cost of capital 7% Minus expected inflation rate 3% Equals discount rate (cap rate) 4% Land Valuation:Capitalization of Earnings

  11. Capitalized Land Value • Land value = $198 / .04 = $4,950 per acre

  12. Adjust for % Tillable • Example: • 75 acres tillable out of 80 =93.75% • $4,950 x 93.75% = $4,640 per tillable acre

  13. Farmland values depend on: • Productivity (supply of crops) • Crop selling prices (demand) • Costs of production • Interest rates • Inflation rate • Alternative investments

  14. Comparative Sales • Recent actual sales • Similar land • Same area

  15. $6,413 75 CSR $86/pt $5,540 75 CSR $74/pt • Recent Farmland Sales $6,450 85 CSR $76/pt $6,000 88 CSR $68/pt

  16. Adjust for Productivity CSR Rating x $ per CSR point = Estimated value Example: Comp. sales averaged $75 per CSR point $75/ CSR point x 80 CSR = $6,000 x 93.75% tillable = $5,625

  17. Comparative SalesFactors to compare: • Productivity + or - • Location + or - • Other uses/income + or - • Family sales - • Sales contract + • Size of tract + or -

  18. Financial Analysis of a Land Purchase • Where can I obtain financing? • Equity (savings) • Credit: banks, Farm Credit Services • Installment contract • Will it cash flow? • On its own? • With help from other sources?

  19. Sale price Down payment (30%) Loan amount(2/3) Amortization factor (7%, 25 yr loan) (p.418) Annual payment Income available Surplus/deficit $5,000 -1,500 = $3,500 x .0858 = $300 $198 $102 Cash Flow Analysis

  20. Maximum Loan that will Cash Flow • $198 / .0858 = $2,308 • Need about 50% down payment. • Or subsidize from other land that is paid for, livestock income, outside income.

  21. Acres Farmed by owner 40% Cash rent 45% Crop share rented 13% Custom farmed 2% Farmland Leasing in Iowa

  22. Ownership Security Inflation hedge Pride Build equity Loan collateral Rental Flexibility Lower cash cost No investment Larger scale Own vs. Rent

  23. Cash Leases • Tenant pays a fixed rate • Tenant takes all the risk • Rent may be due in advance • Most are one-year agreements • More management freedom • Fewer records to keep

  24. Net Returns to Land CornSoybeans Average Yield 180 50 Price $3.75 $9.40 Gross income $666 $470 $568 Seed, fert, pest. 280 160 Mach. Ownership 50 50 Mach. Operating 30 25 Drying 40 0 Labor 3025 Total nonland costs $430 $260 $345 Net return to land $223

  25. Estimating a Fair Rent Tenant’s Residual (max. to pay) CornBeans gross income $666 $470 nonland costs - 430-260 =residual $236 $210 Machinery fixed costs? $223 Labor? USDA payments?

  26. Estimating a Fair Rent % of gross income typically 30 to 40 % for corn typically 40 to 50 % for beans Corn: $666 x 35% = $233 Soybeans: $470 x 45% = $211 Average $222

  27. Cash Rent Based on Yields • Corn: $1.00 - $1.20 per bushel • Soybeans: $3.50 - $4.00 per bu. • Example: Corn: 180 bu. X $1.10 = $196 Soybeans: 50 bu. X $3.75 = $187.50

  28. Flexible Cash Leases • Rent is paid in cash • Amount of rent depends on actual prices and/or yields • Tenant pays all crop expenses • Tenant and owner share risks • Must agree on how to calculate rent, and how to determine actual price and yield

  29. Flexible Rent Example Rent = % of Gross Revenue Typical: 30-40% (180 bu. @ $4.00) x 35% = $216 (120 bu. @ $4.50) x 35% = $189 (220 bu. @ $2.50) x 35% = $192 -May set a minimum and maximum rent.

  30. Crop Share Leases • Tenant and owner divide crop • 1/2 and 1/2 is typical • Tenant and owner share cost of crop inputs (seed, fertilizer, pesticides, drying, crop insurance) • Tenant supplies labor and machinery • Both price and production risk are shared • Less capital is required from tenant

  31. Evaluating a Share Lease Corn Total Tenant Owner Seed,fert,pest $280 $140 $140 Machinery 80 80 0 Drying 40 20 20 Labor 30 30 0 Management 33 33 0 (5% of gross $666) Land $180 0 $180 Total $643 $303 $340 Share 100% 47% 53%

  32. Developing a Good Lease • Discuss details and put it in writing • Treat the land as if it were your own • Communicate frequently • Consider environmental effects • Go the extra mile • The tenant that will pay the most is not always the best

  33. Custom Farming • Operator supplies labor and machinery, only • May buy supplies, choose inputs, etc. • Receives a fixed payment, sometimes a bonus or % of crop • Owner takes all the risk

  34. Contract Farming • Usually involves growing specialty crops • high oil corn, seed corn, organic grains, etc • May receive a fixed payment • May receive a guaranteed price • Must meet quality standards • Management requirements are stricter • May need separate storage • Need a guaranteed market

  35. Contract Finishing • Operator provides buildings, labor, operating costs • Contractor provides animals, feed, health services, marketing • Operator receives a fixed payment per animal or space. May have a bonus. • Limited risk, limited returns

  36. Custom Feeding(mostly cattle) • Operator supplies feedlot, labor, feed, and all operating expenses • Owner of cattle pays a yardage fee ($ per head per day) plus health costs, feed costs, transportation

  37. Livestock Share Lease • Crop costs split same as crop-share lease • Owner provide buildings, pasture, stationary equipment • Tenant provides movable equipment, labor • Divide livestock, feed, operating costs • Divide income equally • Not very common now

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