Farm Leasing Arrangements

1. Farm Leasing Arrangements Tim Eggers Field Agricultural Economist teggers@iastate.edu 712-542-5171 www.extension.iastate.edu/feci

2. Agenda Trends in Farmland Values Trends in Cash Rental Rates Determining a "Fair" Cash Rental Rate Property Tax Valuation

3. Rental Ethics – Our perceptions… Tenants have the information (power) Cash rents tend to rise over time Manna-from-heaven payments often should be shared Foot-in-door high rents often inappropriate Landowners need money just like tenants Landowners are sometimes unethical too Family situations often are the worst Ethical behavior more profitable in long run www.agmanager.info

4. Tenants have the power! Landowners often: Are generations and geographically removed Are technologically removed Are old and easily taken advantage of View the arrangement with a tenant as a long-term commitment handed down from their parents Think that farming is a low-income business and so want to “do their part” in aiding it Believe there are few potential tenants and so are beholden to the existing tenant Tenants take advantage of the situation Unintentionally (may be poor managers) Intentionally (“she never asked me to raise rent”) Only occasionally do we see a landowner taking advantage of a tenant www.agmanager.info

5. Cash rents rise over time Although cash rents do fall about 30% of the years, on average they rise 2-3% annually Unusual to see a 3-year contract rate that shouldn’t be higher than the previous contract Landowners & tenants who see stable crop-share terms for years think that translates to stable cash rent We see cash rental rates that haven’t changed for years and decades Landlord: “We didn’t know.” Tenant: “She never asked for a higher rent.” www.agmanager.info Cash rents fall 20% of the time in Iowa. On average they rise by 4%.

6. Foot-in-door high rental payments High rent payments on new contracts often are followed by stagnant rates for many years, which could be: A) Tenant overbids to get land, then realizes he’s not profitable so rationalizes stagnant rents B) Tenant uses this as a strategy to acquire land and pay lower-than-market rents over time This is the least ethical outcome of the two Some tenants who do this actually beg for lower rents in near future, realizing that landlords are reluctant to change tenants This is really unethical! www.agmanager.info

7. Landowners need money too Tenants often make the argument that “she doesn’t need the money” This is completely irrelevant! Admittedly, landowners sometimes foster this perception . . . which tends to change when investment-minded heirs acquire land being rented www.agmanager.info

8. Landowner ethics Landowners may use their land for non-ag purposes and yet expect the same rent Utility poles, oil leases Lease hunting Landowners think if they paid too much for land it should bring a higher rent This is completely irrelevant! Landowners might demand certain farming practices yet expect market rent e.g., no fertilizer; conventional tillage Landowners make demands on current tenants to “fix” problems of past tenants www.agmanager.info

9. Family situations often are the worst “Sweat-equity” parent-child relationships lead to unrealistic expectations across generations Family members have trouble believing their own parents, children, or siblings would cheat them Backlash then goes overboard Family members often are “always around” and so the pain always resurfaces Hard to “forget and move on” www.agmanager.info

10. Ethics is good long run economics Poor ethics results in high tenant turnover: Increases cost of relationship establishment and monitoring Reduces profit to the land (tenant makes short run decisions) Bad business leads to unethical behavior Poor management causes “I deserve more” Bad behavior is rationalized Good ethics should emerge because it is the “right thing to do,” not for the purpose of long-run profit-maximization www.agmanager.info

12. 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 • http://www.extension.iastate.edu/agdm/wholefarm/html/c2-70.html • Federal Reserve Bank of Chicago • quarterly survey of ag lenders by state • http://www.chicagofed.org/digital_assets/publications/agletter/2010_2014/may_2011.pdf • Realtors Land Institute • semi-annual survey (March and September) • compares land classification by corn production • includes pasture and timber land • http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-75.pdf

13. Southwest $4,325 high $5,335 med $4,140 low $2,868 up 21.5% up $766

14. AVERAGE VALUES all grades 1950−2010

15. POSITIVE FACTORS affecting land values

16. NEGATIVE FACTORS affecting land values

17. WHO PURCHASED farmland

18. Estimates of average dollar value per acre by crop reporting districts as of Nov. 1, 2010 First line: high, medium, and low grade farmland values Second line: district averages Third line: average percent change since Nov. 1, 2009

20. CHANGE IN sales activity from previous year

22. Iowa Farm & Land Chapter #2Realtors Land Institute March 2011

23. August 2011 USDA NASS $196 average cash rent 3.5% rent/value

24. Land Bubble or Landmine August USDA World Agricultural Supply and Demand estimated the US corn crop at 12.91 billion bushels Feed and residual use 4.9 38% Ethanol use 5.1 39% Interest Rates Impacted by exchange rates Farm Profitability Demand for food, fiber and fuel

25. Prime Interest Rate

26. Farm Profitability “Economic profits” don’t last long in a competitive market “Economic profits” destroyed by: – Falling output prices due to increases in production – Increased costs Production costs Land prices/rents Number of producers

27. Farm Profitability • Can the world increase yields? • Traditional breeding • GMO • Drought tolerant, Insect tolerant, Frost tolerant • Water utilization • Can we put more land into production? • Africa • FSU • Arid regions

31. Land Quality Sites http://ortho.gis.iastate.edu/ http://websoilsurvey.nrcs.usda.gov/ http://www.google.com/earth/

32. Calculating CSRs

33. Ortho.gis

35. Crop Share 50-50 Lease Landlord Tenant Labor ½ inputs Machinery Management Land ½ inputs ½ income ½ income

37. 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

38. Determining A “Fair” Cash Rent Value

39. December 2012 Corn Futures

40. November 2012 Soybeans

41. Power Machinery Cost andInvestment Cost (Per Acre)

42. Direct Corn Expenses

43. Direct Bean Expenses

44. Fuel CostsAugust 9, 2011 Release http://www.eia.doe.gov/emeu/steo/pub/contents.html

45. Page County Fair Cash Rent

46. Crop Share 50-50 Lease Corn Landlord Tenant Land $301 ½ inputs $185 Labor $ 31 ½ inputs $185 Machinery $ 67 Management $ 60 ½ income $472 ½ income $472 Profit $129

47. Crop Share 50-50 Lease Soybeans Landlord Tenant Land $225 ½ inputs $91 Labor $ 27 ½ inputs $ 91 Machinery $ 59 Management $ 60 ½ income $314 ½ income $314 Profit $77

48. Assumptions Location: Page County Tillable Acres: 140 Acres Corn Yield: 151 bu/Acre Soybean Yield: 48 bu/A Corn Suitability Rating: 71 CSR

49. Cash Rent Market Approach • c2-10 Cash Rental Rates for Iowa 2011 Survey (released in June) • Methods for Determining Cash Rent Values • c2-20 Computing a Cropland Cash Rental Rate • What Others are Charging/Paying • Average Yields • Corn Suitability Rating (CSR)

50. 2011 Iowa Cash Rent Survey 224 220 223 227 226 219 198 177 213