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Farm Management. Chapter 20 Land Control and Use. Chapter Outline. The Economics of Land Use and Management Controlling Land Own or Lease? Buying Land Leasing Land Conservation and Environmental Concerns. Chapter Objectives.
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Farm Management Chapter 20 Land Control and Use
Chapter Outline • The Economics of Land Use and Management • Controlling Land Own or Lease? • Buying Land • Leasing Land • Conservation and Environmental Concerns
Chapter Objectives • To explore the unique characteristics of land and its use in agriculture • To compare the advantages and disadvantages of owning and renting land • To explain important factors in land purchase decisions, methods of land valuation, and the legal aspects of a land purchase • To compare the characteristics of different leasing arrangements • To demonstrate how an equitable share leasing arrangement can be developed • To discuss profitable land management systems that conserve resources and sustain the environment
Figure 20-1Farmland values in the United States (excludes Alaska and Hawaii)
The Economics of Land Use and Management Land is a permanent resource that doesn’t depreciate or wear out. Land is immobile and cannot be moved. Because the supply of land is essentially fixed, land prices are very sensitive to changes in demand for its products.
Controlling Land Own or Lease? How much land to control and how to acquire it are two of the most important decisions to be made by any farmer or rancher. Land acquisition should be thought of in terms of control. Control can be achieved by ownership or by leasing. Nearly half of U.S. farmland is leased.
Advantages of Ownership • Security of tenure • Loan collateral • Management independence and freedom • Hedge against inflation • Pride of ownership
Disadvantages of Ownership • Cash flow • Lower return on capital • Less working capital • Size limits
Advantages of Leasing • More working capital • Additional management • More flexible size • More flexible financial obligations
Disadvantages of Leasing • Uncertainty • Poor facilities • Slow equity accumulation
Buying Land Value is determined by: • Soil, topography, and climate • Buildings and improvements • Size • Markets • Community • Location • Competing uses • Agricultural program characteristics
Land Appraisal • Income capitalization • Market data
Income Capitalization The estimated land value, V, is: R V = d where R is the annual net income and d is the discount rate.
Market Data Prices of comparable sales are adjusted for differences in factors contributing directly to value as discussed earlier. It is also important o consider: • Financing arrangements • Relationships of buyer and seller • Time of sale
Table 20-1Estimated Annual Income and Expenses for Appraisal Purposes hypothetical 160 acre tract with 150 tillable acres
Table 20-2Cash Flow Analysis of the Purchase ofa 160-Acre Tract at $1,600 per Acre
Leasing Land A lease is a legal contract whereby the landowner gives the tenant the use of the land for a certain time in return for a specified payment. Leases on agricultural land are influenced by local custom. Type, terms, and length of leases tend to be uniform in an area.
Cash Rent Rent is paid in cash. It may be due in advance or at the end of the production season. Under a cash lease, the tenant receives all the income generated and usually pays all expenses except property taxes and other ownership costs of the property.
Figure 20-3Average cropland cash rental rates per acre, by region
Crop Share Leases Crop share leases are popular in areas where cash grain farms are common. These leases specify that the landlord will receive a certain share of the crop. The tenant usually supplies all machinery and labor. Some variable expenses may be split.
Other Types of Leases • Labor share lease • Variable cash lease • Bushel lease • Custom farming
Table 20-5Example of Inefficient Fertilizer Use Under a Crop Share Lease
Table 20-6Determining Income Shares Under a Crop Share Lease
Conservation and Environmental Concerns Conservation can be defined as the use of farming practices that will maximize the net present value of the long-run social and economic benefits from land use. Ordinary budgeting techniques are often inadequate for deciding how best to achieve the goals of conservation.
Long-Run versus Short-Run Consequences Most conservation practices require some extra expenditures. They may also reduce crop yields in the short run. The short-run reduction in profit may be necessary to achieve higher profits in the future or to prevent a long-run decline in productivity.
Farming Systems Analysis Most farms and ranches carry out more than one type of crop or livestock enterprise. Farming systems analysis involves understanding how different enterprises affect each other.
Off-Farm Effects Many of the decisions made by farmers and ranchers have consequences that go far beyond the boundaries of the farm. Agriculture must consider more than just farm input costs when making decisions about input use. The total societal costs of using various technologies is becoming an important factor in choosing practices.
Regulations and Incentives Both the federal and state governments have enacted laws to promote and sometimes require land use and production practices that preserve and enhance soil, water, and air resources. Future conservation efforts may increasingly become a matter of selecting the least-cost combination of practices to meet the relevant target.
Summary Land is an essential resource for agricultural production. The decision to buy or lease land will affect the production capacity and financial condition of the business for many years. In making land-use decisions, farmers and ranchers also need to consider the long-run environmental consequences.
