Farmland Leasing Arrangements

1. Farmland Leasing Arrangements Craig Chase, Field Specialist Farm & Ag Business Management

2. Session Topics • Land Values • Cash Rental Rates • Leasing Practices • Crop-Share Leases • Calculating a Cash Rent Lease • Flexible Cash Leases

3. Background • Land values have been increasing for the past several years. Record levels for each of the past 4 years. • Increases fueled primarily by poor overall economy, low interest rates and attractiveness of land investment. Investors were more important in the market the past several years.

4. Background • Bioeconomy has created a boom in the land market since last fall. • Land value increases are continuing at a rapid rate. • Existing farmers are becoming more active participants. • Land has increased 73% since 2000.

7. 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

9. Positive Factors Affecting Land Values, 2003-2006

15. Recent Land Value Estimates • Chicago Fed reported a 7% increase in the 1st quarter and a 16% increase April to April for the 7th District. • Iowa Chapter of Realtors Land Institute reported a 13.6% increase from September to March. • ISU Soil Management Conference participants estimated a 20% increase from Nov. to Nov. 6% increase from Nov. 07 to Nov. 08.

16. Factors to Watch • Overall performance of the economy, especially interest rates. • Recreational demand. • Performance of the housing market. • Aging farmland owners and what the second generation will do with the land.

17. Factors to Watch • The bioeconomy, especially corn based ethanol. • The government programs, new farm bill will be out this year; outcome for level and type of programs is unknown; more of the same but less of it; major cuts? Regional differences could be a major factor; Public sentiment.

20. Cash/Crop Share/Owner Operator

21. Leasing Practices

22. Leasing Practices

23. Crop Share Practices

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

25. Crop Share 50-50 Lease Landlord Tenant Land $180 ½ inputs $ 90 Labor $ 28 ½ inputs $ 90 Machinery $ 57 Management $ 95 ½ income $270 ½ income $270

28. Quick Overview • From the Owner’s perspective: • Which lease is least volatile from year to year? • From the Tenant’s perspective: • Which lease is most volatile from year to year?

29. Determining A “Fair” Cash Rent Value

30. Supporting Information Location: Black Hawk County Tillable Acres: 400 Acres Corn Yield: 180 bu/Acre Soybean Yield: 50 bu/A Corn Suitability Rating: 80 CSR

31. Calculating Cash Rent Values • Cash Rent Market Approach • ISU Extension Publication FM 1851 – Cash Rental Rates for Iowa 2007 Survey (released in May) • Three Methods for Determining Cash Rent Values • Typical Cash Rent • Average Rent for Production • Average Rent for Corn Suitability Rating (CSR)

33. Calculating Cash Rent • Typical Cash Rent • Select the Area of the State/County • Area 8 County Black Hawk • Determine Overall average $ 185 • High Quality Third = $ 208 • Middle Quality Third = $ 181 • Low Quality Third = $ 159

34. Calculating Cash Rent • 2 a. Average Rents Per Unit – Corn Yield • Select the Area of the State/County – Black Hawk • Determine Average Rent for Corn • Farm’s Average Corn Yield (bu/A) 180 • Times rent per bushel of Corn yield $ 1.14 • Equals the Average Rent for Corn Acre $ 205

35. Calculating Cash Rent • 2 b. Average Rents Per Unit – Soybean Yield • Select the Area of the State/County – Black Hawk • Determine Average Rent for Soybeans • Farm’s Average Soybean Yield (bu/A) 50 • Times rent per bushel of Soybean yield $3.87 • Equals the Average Rent for Soybean Acres $ 194

36. Calculating Cash Rent • Average Rents Per Unit – Corn & Soybeans • Add the Average Rent for Both – Black Hawk • Corn Average Rent $ 205 • Soybean Average Rent $ 194 • Average Rent Corn & Soybeans $ 200

37. Using Corn Suitability Rating (CSR) • Average Rents Per CSR Index Point • Select the Area of the State/County – Black Hawk • Determine the Average Cash Rent using CSR • Farm’s Average Corn Suitability Rating 80 • Times rent per CSR index point $2.31 • Equals the Average Rent for all Row Crop Acres $ 185 Source: ISU Extension Publication FM- 1851

39. 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

40. Overall Average • Average all 3 Methods – Black Hawk • Method 1: Typical Cash Rent $ 185 • Method 2: Average Rents per Unit $ 200 • Method 3: Average Rents per CSR Index Point $ 185 • Total all Methods and divide by 3 $190 /A • $190 /A X 400 Tillable Acres = $76,000 Source: ISU Extension Publication FM- 1851

41. Cash Lease Calculations 4. Gross Income Method 5. Tenant Residual Method 6. Crop Share Method 7. Return on Investment Method • Assumptions:400 crop acres, 180 bushel corn yield, 50 bushel Soybean yield, • Corn Market Price $3.00 / bu, Soybean Market Price $7.50 / bu, • Direct Government Payments average $22.00 / acre

42. Share of Gross Income CORN: (180 bu X $3.00) + $22 = $562.00 SOYBEANS: (50 bu X $7.50) + $22 = $397.00 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 4a. CORN: $562.00/ac X 35% = $ 197 4b. SOYBEANS: $397.00/ac x 40% = $ 159 4. Average $ 178

43. Tenant Residual Method 5a. CORN: $562 – $339 = $223 5b. SOYBEAN: $397 - $187 = $210 5. Average: $217 Costs: FM-1712 less land

44. Crop Share Method 50-50 Share Income: Corn: 50 % x 562 = $281.00 Soybeans: 50 % x $397 = $198.50 Expense: Corn: 50 % x $243.50 = $124.75 Soybeans: 50 % x $113.00 = $56.50 Equivalent Rent: 6a. Corn: $281.00 - $124.75 = $156.25 6b. Soybean: $198.50 - $56.50 = $142.00 6. Average: $149 • The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime, • pesticides, crop insurance, interest and miscellaneous, and drying.

45. Return on Investment Method Iowa farm estimated to have a market value of $3,700 per acre. 7. Expected Rent: (5%) X $3,700 / acre = $185 / acre

46. Calculation Method Corn Soybeans 1. Cash Rent Survey 2. Per Bushel Yield 3. Per CSR Point 4. Gross Income 5. Tenant Residual 6. Crop Share 7. Return on Investment Average $185 $185 $205 $194 $185 $185 $197 $159 $223 $210 $156 $142 $185 $185 $209 $180 All Average: $195 2006 Average: $157 24% increase Black Hawk

47. Future Consideration • What are prices (income) going to be? • Ethanol impact – how long? • Shifts in what is grown – Global impact? • What are inputs going to cost? • Higher oil, higher fertilizer costs. • Higher demand for seed, technology cost.

48. December 2007 Corn Futures

49. November 2007 Soybean Futures

50. December 2008 Corn Futures