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Farmland Values and Leasing Key Questions Chapter 20

Farmland Values and Leasing Key Questions Chapter 20. 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?. Land Value Trends in Iowa. 1973-1981

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Farmland Values and Leasing Key Questions Chapter 20

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  1. Farmland Values and LeasingKey QuestionsChapter 20 • 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?

  2. Land Value Trends in Iowa • 1973-1981 • Increased export demand • High grain prices • Low interest rates • High inflation rate

  3. 1982-1986 • Higher interest rates • Lower inflation • Weather problems • Forced sales • Since 1986 • Farm economic recovery • Government payments • Higher yields • Lower interest rates

  4. Who Buys Iowa Farmland?

  5. 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.

  6. 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?

  7. V = R / d V = value of asset R = expected annual earnings--$ d = discount rate Discount Rate Average cost of capital 6-7% Minus expected inflation rate 2-3% Equals discount rate 4% Land Valuation:Capitalization of Earnings

  8. Net Returns to Land CornSoybeans Average Yield 165 52 Price $2.40 $6.00 Gross income $396$312 $354 USDA direct payment 24 $378 Seed, fert, pest. 160 100 Mach. Ownership 40 25 Mach. Operating 30 20 Drying 21 0 Labor 2523 Total nonland costs $276 $168 $222 Property taxes, etc. 24 Net return to land $132

  9. Capitalized Land Value • Land value = $132 / .04 = $3,300 per acre

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

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

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

  13. Value Based on Productivity CSR Rating X $ per CSR point = Estimated value Example: Comp. sales averaged $50 per CSR point $50/ CSR point x 80 CSR = $4,000

  14. Adjust for % Tillable • Example: • 75 acres tillable out of 80 = 93.75% • $3,000 x 93.75% = $3,750 per acre

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

  16. Sale price Down payment (1/3) Loan amount(2/3) Amortization factor (7%, 25 yr loan) (p.418) Annual payment Income available Surplus/deficit $3,600 -1,200 = $2,400 x .0858 = $206 $120 (86) Cash Flow Analysis

  17. 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

  18. Land Farmed by owner 46% Farmed by tenant 54% Types of Leases--acres Cash 69% Crop Share 30% Other 1% Farmland Leasing in Iowa

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

  20. 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

  21. Estimating a Fair Rent Tenant’s Residual (max. to pay) = gross income - nonland costs gross income $378 nonland costs 222 residual $156 Machinery fixed costs? Labor?

  22. Estimating a Fair Rent % of gross income (typically 35 to 40 %) C: ($396 + $24) x 35% = $147 SB: ($312 + $24) x 40% = $134

  23. Cash Rent Based on Yields • Corn: $.90 - $1.00 per bushel • Soybeans: $2.70 - $3.00 per bu. • Example: Corn: 165 bu. X $.90 = $148 Soybeans: 52 bu. X $2.80 = $146

  24. 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

  25. Flexible Rent Example Rent = % of Gross Revenue Typical: 30-40% (165 bu. @ $2.40 + $24) x 35% = $158 (100 bu. @ $2.80 + $24) x 35% = $106 (200 bu. @ $2.50 + $24) x 35% = $183 -Usually include government payments. -May set a minimum and maximum rent.

  26. 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

  27. Evaluating a Share Lease Corn Total Tenant Owner Seed,fert,pest $160 $80 $80 Machinery $ 70 70 0 Drying 21 15 6 Labor 25 25 0 Management 20 20 0 (5% of gross $396) Land $140 0 140 Total $436 $210 $226 Share 100% 48% 52%

  28. 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

  29. 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

  30. 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

  31. 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

  32. 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

  33. 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

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