8/1/2016
1
FARMLAND LEASING ARRANGEMENTS AND LAND
VALUES
Melissa O’Rourke B.S., M.A., J.D.
FARM & AGRIBUSINESS MANAGEMENT SPECIALIST
Housed at ISU Extension—
Winneshiek County in Decorah
www.extension.iastate.edu/agdm
[email protected] 563-382-2949
Read about Kevin & Lisa Martin (Farmers) and Susie Williams & Sam Williams (Landowners). We’ll discuss their viewpoints later today.
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ISU Extension Farm Management
Team
Key Topics Today: ► Trends in . . .
–Farm land values
–Cash rental rates
► Costs of crop production -- resources
► Negotiating a fair cash lease rate
► 2017 Farm Leasing Considerations:
–Communications
–Legal issues
– . . . And much more!
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The Goal? • You leave here today with
increased knowledge and
confidence to assist you to - -
– Review current leasing
arrangements . . .
– Take steps to plan for the
future . . . and
– Know where to go for
resources and assistance.
www.extension.iastate.edu/agdm
Get familiar with Ag Decision Maker!!
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Example: Calculating Cash
Rent Tax Credit
• 160 acres cash rented
• $300 per acre
• $48,000 gross lease
income
• $48,000 x 7% = $3360
Iowa income tax credit
• Can be used for flexible
& crop-share leases too.
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For More Information and to Apply:
• See 3-page application at:
• IowaFinanceAuthority.gov
• Beginning farmer’s
financial statement
• Beginning farmer’s
background letter
• Fees = start at $300 and
depend on the length of
the lease
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You Answered—We Listened: Which
of the following would you consider
to be your PRIMARY occupation?
Answer Response %
Non-farming landowner 144 44%
Active farmer 97 29%
Ag lender 24 7%
Attorney or Accountant 8 2%
Professional farm manager 3 1%
Other (please specify) 53 16%
Total 329 100%
N=382 excludes Not Lessors/Not Lessees
Decrease rent 30%
No changes will be made
24%
Change type of lease 9%
Other 9%
Move from an oral lease to a written lease agreement
9%
Apply for the Beginning
Farmer Tax Credit or Custom
Farming Tax Credit
4%
File and perfect a
landlord's lien 3% Increase rent
3%
Intended Changes to Lease Arrangements:
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You answered, we listened:
Why do you participate in
farmland leasing meetings?
1. Gain knowledge on farmland
leasing, rental market and
trends
2. Improve knowledge for
communicating with other
parties involved
3. Gain knowledge on leasing
practices
You answered, we listened:
What topics would you want covered at the 2016 Farmland Leasing Meeting?
1. Setting rates and determining what is fair
2. Costs of production, profitability
3. Taking care of the land
4. Types of leases
5. Legal updates – negotiations, terminations
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Thinking About Farmland Leasing
from Two Different Perspectives
-Meet Kevin & Lisa Martin -and-
Susie Williams & Sam Williams
• Take 5 minutes to read through the cases.
• Take another 5-10 minutes to visit about the
cases with others.
• These folks will be with us for the rest of the
program.
Kevin & Lisa Martin
Susie –and– Sam Williams
Different Perspectives
• What additional questions do you have now as
the Martins, or the Williams siblings?
• Consider how each party in the farmland leasing
arrangement thinks differently about how the
other party interprets and uses information.
• What if Sue & Sam decided they wanted to
consider a new tenant for 2017 – what questions
should they ask of the potential tenant(s)?
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What are some
sources of Iowa
Farmland Value Data?
Why is it important for
Kevin & Lisa Martin and
Susie Williams and Sam
Williams to think about
farmland values?
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County Assessors’ Offices • Some county assessors maintain a public (pdf)
document of ag land sales – for example:
• http://siouxcounty.org/wp-content/uploads/2016/05/agsales.pdf
Most county assessor offices in Iowa offer a search tool to find information about real estate ownership, values and sales within the county.
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Realty & Auction Websites
Federal Reserve Bank—Chicago
• www.chicagofed.org – Quarterly survey of ag
lenders by state
– Annual Land Values Conference
– AgLetter: Quarterly Newsletter re: ag land values & credit
– Go to chicagofed.org and click on publications
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Agricultural land values in the Seventh Federal Reserve District fell 4 percent from a
year ago in the first quarter of 2016—their largest year-over-year decline since the
third quarter of 2009. There was a decrease of 1 percent in “good” farmland values
in the first quarter of 2016 relative to the fourth quarter of 2015, based on the survey
responses of 200 District agricultural bankers. Cash rental rates for District farmland
experienced a significant drop of 10 percent for 2016 compared with 2015—even
larger than the decrease of last year relative to 2014. Demand to purchase
agricultural land was markedly lower in the three- to six-month period ending with
March 2016 compared with the same period ending with March 2015. Moreover,
the amount of farmland for sale, the number of farms sold, and the amount of
acreage sold were all down during the winter and early spring of 2016 compared
with a year ago. Nearly two-thirds of the responding bankers expected farmland
values to decrease during the second quarter of 2016, with the rest expecting
farmland values to remain stable.
AgLetter
Federal Reserve Bank of Chicago
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Realtors Land Institute –See your book – at page 35
– Semi-annual survey (March and September)
– Compares land classification by corn production
– Most recent survey always available on Ag Decision Maker
– www.extension.iastate.edu/agdm
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http://usda.mannlib.cornell.edu/usda/current/AgriLandVa/AgriLandVa-08-05-2015.pdf
- Dollars per acre and percent change from 2014
“The Iowa farmland market is showing weakness following
significant increases in value over the past decade. Based on
the Iowa State University Farmland Value Survey, 2015 Iowa
land values have decreased two years in a row since 2000.
However, despite these decreases, current Iowa farmland
values are still more than double what they were 10 years
ago, 75 percent higher than the 2009 values and 14 percent
higher than the 2011 values.”
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Value in each year of $1,000 invested in 1950 in Iowa farmland or the S&P
Iowa State University
Farmland Value Survey – Conducted annually since 1941
– Mailed to 1100 licensed real estate brokers; 500-600 responses
– Released annually in mid-December
– November 1 to November 1
– Latest and historical surveys found on Ag Decision Maker website
– www.extension.iastate.edu/agdm
SEE YOUR BOOK – page 27
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Iowa Farmland Value Portal
http://card.iastate.edu/farmland
Farmland Value per Acre 1950-2015
0
2000
4000
6000
8000
Land v
alu
e p
er
acre
($/a
cre
)
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$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
$11,000
$12,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$ p
er
acre
High Medium Low
Farmland Values for Crop
Reporting District 3 by Year
↓$1,300
↓14%
Iowa Farmland Purchases by Farmers and
Investors and Land Values 2006-2015
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
$10,000
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%A
ve
rag
e L
an
d V
alu
e p
er A
cre
Pe
rce
nt o
f S
ale
s
Farmers Investors Average Land Value
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Crop
Reporting
District 3
Crop Reporting
District 2
Farmland Values Predictions
in Five Years
District
Increase
5% or
more
Increase
0-5%
Stay the
same
Decrease
0-5%
Decrease
5-10%
Decrease
10% or
more
PERCENT
Northwest 16 18 20 16 16 14
North Central 16 12 10 17 22 22
Northeast 7 22 15 10 22 24
West Central 20 20 16 14 16 12
Central 22 21 19 8 19 11
East Central 9 19 17 19 19 19
Southwest 18 15 21 10 13 23
South Central 12 12 15 12 32 18
Southeast 6 14 26 14 17 23
STATE 14 17 17 14 19 18
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SUMMARY: Land Value Survey
• Farmland values hit a historic peak of $8,716 per acre in 2013, but declined 8.9% to $7,943 the following year.
• Drop in value in 2015 is smaller than 2014; but marks the third time values have fallen since 2009.
• The 3.9% percent decline may seem less than what many people speculated, but this is not out of line due to a mix of factors, including a lot of cash in hand for many farmers, market expectation of this decline early on, robust livestock returns, and strong recreational demand.
• Despite decreasing again, farmland values are still more than 2X the reported values from 10 years ago, and almost 14 % higher than 2011 values.
• Farm income & interest rates are key to watch
• For more info visit www.card.iastate.edu
• Impacts for Kevin & Lisa Martin?
• For Susie Williams and Sam Williams?
Landlord-Tenant
Communication:
It’s a 2-way street
• Farmland owners need to be
open to learning about current
farming challenges, conditions,
costs of productions
• Producers need to listen to the interests and goals
of farmland owners; and be willing to share
information about inputs, yields, and crop plans
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Communication
Methods:
• Newsletter
• Facebook, Twitter, blog
• Phone calls
• Stop by for a cup of coffee
• Annual or periodic meetings
• KEY: Don’t limit
communication to annual
rent payment and rent
negotiations.
• More farmland owners
require written annual report
as a lease condition.
• Owner agrees: Information
provided by the Tenant
(such as yields,
management practices) is
kept confidential.
• Proprietary business
information needs to be
shared to negotiate lease
terms – but it is not to be
shared in the “coffee shop.”
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Winning Communication
Strategies:
• Communicate regularly, not just once a year
• Producers: Take time to share and educate Owners about current trends in agriculture, farm costs
• Provide regular crop reports during growing season
• Maintain farm appearance
• Treat landowners like family – with respect and kindness.
Communication-Negotiation
Process Tips:
• Start early, use data –
• Base conversations on facts
• Producers: Know your costs, • overhead, breakeven points
• Producers: Understand challenges landowners face with declining revenues
• Producers: Share information on yields, prices, records, satellite photos, fertility records, government payments, crop insurance
• Landowners: Know your costs, know what you need
• Landowners: Learn about production costs
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Communication Setbacks?
• Ask for more time
• Be aware of your non-verbal communication
• Focus on what the other person is saying and what they really mean
• Request more information to clarify points.
• Ask if other party has areas of compromise or negotiation.
• Stick to building trust, use tact and logic
• Try to understand the other party’s perspective – “new truck”
• Use a third-party to help mediate, guide discussion
Farm Lease Basics:
A Few Pointers
• Strong preference for
written leases – See
your book – page 94
(short form)
• Legal issues, including
lease termination
• Communication
fundamentals
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Why should a farm lease be written?
• Provides more assurance
that the parties understand
one another.
• Lease of more than 1 year
must be in writing to be
enforceable.
• Lease of 5 years or more
must be in writing and
recorded at the county
recorder’s office.
Shouldn’t a handshake be
good enough? • Don’t rely on selective
memory.
• Be sure that you cover all
the provisions that you
intend to cover.
• Define meaning of terms.
• Put things in writing
because you value the
relationship . . . and
because you don’t want
there to be later
misunderstandings!
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A Few Examples . . . .
• Fencing
• Hunting rights
• Crop residue
(stover)
Assuring the Rent is Paid
• How can parties
assure one
another that the
rent will be paid?
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First Step? -- Use a written lease.
And, be sure that:
(1) The legal description
and parcel number in
the lease is accurate.
(2) The parties to the lease
are properly identified.
(3) The lease terms are
clear.
Additional tools to assure rent
payment may include:
• Require all rent paid on March 1. (Reduction for interest paid by the borrower may be a consideration.)
• Require irrevocable letter of credit from the Producer/Tenant’s lender.
• Require Landlord’s name be included as Payee on checks for crops.
• File and perfect a Landlord Lien – this includes recording the lease – seek professional legal assistance for this.
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Farm Lease Termination: Does lease
termination mean the end of the
Owner–Tenant relationship?
• Not necessarily – but it means either the Owner (or the Tenant) want to make some changes for the next year.
• See your book – page 97
Without written notice of termination, lease
automatically renews under the same terms and
conditions for the following crop year.
Farm Lease
Termination: • Iowa Code 562.6: Amended in 2016 to clarify that whether
the lease is oral or written, the termination notice must be in writing!
• Notice cannot be contained within the lease – it must be a separate written notice.
• Serve written notice on or before September 1 (this terminates the current least on the following March 1).
• Serve in person (have them sign the notice and keep a copy); or by Certified US Mail (keep copy of receipt, return receipt optional); or by publication if neither in-person or mail can be accomplished.
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Turn to page 37
in your book
We’ll look at the 2016
Cash Rental Rate survey
– and walk through
some calculations and
ways to think about how
to arrive at a number
that is fair to both the
Owner and the Producer.
When you have time,
read through this page
that explains the survey
methodology and
information.
Average/Typical Cash Rents for
Corn & Soybean Acres – p 38
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We’re focusing on counties in
Crop Reporting Districts 2 or 3
State and Crop Reporting
District Average Rent by Year
$144 $157
$190 $186 $192
$223
$266 $281 $277 $273
$100
$150
$200
$250
$300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
StateDistrict 3
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Projected 2016 ARC-CO Payments
Corn
*Payments based on yield and price projections as of 7/13/2016
Marshall
Benton
Clay
Shelby
Clayton
Jackson
Hamilton
Taylor
Muscatine
Wright
Clinton
Iowa
Buena Vista
Woodbury
Kossuth Worth
Washington
Sac
HumboldtCherokee
WinnebagoLyon
Marion Keokuk
Johnson
Monroe
O'Brien
Dubuque
Van Buren
Franklin
Guthrie
Jefferson
Floyd
Appanoose Davis
Clarke
Black Hawk
Scott
Plymouth
Mitchell
Dallas
Palo Alto
Fremont Ringgold
Butler
Montgomery
Warren
Decatur
Webster
Calhoun
Mahaska
Boone
Linn
Jasper
Page
Ida
Crawford
Adams
Cedar
Carroll
Audubon
Delaware
Hardin
Sioux
Adair
UnionMills
Wayne
Monona
Harrison
Lucas
Polk
Buchanan
Chickasaw
Des Moines
Cass
Allamakee
Madison
Cerro Gordo
Fayette
Bremer
Tama
Osceola
Henry
Poweshiek
Hancock
Winneshiek
Jones
Pocahontas
Greene
Louisa
Wapello
Lee
Story
Grundy
Pottawattamie
HowardDickinson Emmet
$70$67
$61
$73
$72
$53
$13
$63
$27
$74
$32
$41
$12
$62
$36
$0
$25
$27$46
$35$72
$1 $0
$70
$76
$71
$0
$46
$14
$0
$54
$0 $15
$0
$49
$40
$72
$35
$37
$64
$25 $0
$73
$30
$0
$0
$37$30
$13
$48$72
$11
$57
$72
$55
$49
$73
$35
$52
$72$57
$64
$26
$0
$67
$42
$0
$20
$60
$37
$45
$29
$67
$16
$36
$71$34
$60
$60
$0
$23
$52
$72
$71
$34
$42
$48
$6
$32
$48
$75
$0
$39$25 $21
2016 Corn ARC-CO Payment
$50 - $76
$25 - $50
$1 - $25
$0 - $1
No Data
Projected 2016 ARC-CO Payments
Soybeans
*Payments based on yield and price projections as of 7/11/2016
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Projected 2016 ARC-CO Payments
Crop Reporting District 3
$/Base Acre Corn Payment
Soybeans Payment
*Payments based on yield and price projections as of 7/13/2016
www.extension.iastate.edu/agdm/crops/xls/a1-33farmbilldata.xlsx
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What is the Iowa Nutrient
Reduction Strategy?
• Voluntary, science-based program to
reduce Nitrogen and Phosphorous impact
on water
• Includes cities, industry and agriculture
• A practice-based approach to show
meaningful and measureable progress
• A framework for innovation and verification
of new practices and technologies
Financial Impact?
If cover crops result in a decreased level
of profitability, will the Landowner
decrease the cash rental rate to provide
an incentive to the Producer-Tenant to
adopt the strategy?
$-50 $-40 $-30 $20 $-10 $0 $10 $20
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Questions to ask producers:
• Are you raising cover crops? – Yes –
• How many acres?
• Why?
• Does it work financially?
• What’s happening with your production (yields, weed pressure, burn down, differences from year to year)?
• Are there social pressures?
What is cost of production?
It is the sum of costs related to making
or producing a product.
- Land
- Crop Inputs
- Machinery
- Labor
- Page 78 – starting point for cost of
production data.
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ISU Estimated Costs of Production
Released late December or early
January each year
Numbers from several sources: Iowa Farm Business Association
ISU Department of Agriculture and Land
Stewardship
Survey of input suppliers around Iowa
Often used as a gauge for planning
purposes by ag businesses and
financial institutions
Page 78 in your book . . .
Looking ahead…
• Preliminary numbers indicate another year of
economic losses.
• Economic losses are not necessarily cash
losses.
• Cash Outlay – Expenses
– Operating costs, variable machinery costs, hired labor
– Land costs if the land is cash rented, or in the process
of being purchased
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Corn following Soybeans
Preharvest machinery ,
$36.90
Seed, chemicals, etc.,
$292.46 Harvest
machinery, $89.85
Labor, $33.80
Land, $266.00
Soybeans following Corn
[CATEGORY NAME], [VALUE]
Seed, chemicals,
etc., $162.63
Harvest machinery,
$36.95 Labor, $29.25
Land, $266.00
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Fixed Cash Lease – Determining
a “Fair” Rental Rate
http://www.card.iastate.edu/ag_risk_tools/cash-rental-rates/
Interactive Decision Tool
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Computing a Cropland Cash Rental
Rate – see page 65 • We’ll walk through calculations
for 4 different bases for cash
rent calculations:
1. What others are charging
2. Average rent for production
(yields)
3. Average rent for CSR
4. Return on Value
– Other flexible methods
Do Your Farmland Fact Finding 1. Land value estimate for tillable acres ($/acre)
2. Number of Tillable Acres (If you don’t know, check
county USDA FSA Office: Form 578 completed
annually)
3. Corn Suitability Rating? (CSR/CSR2) (See
County Assessor's Office or NRCS Soil Survey)
4. Special features? Drainage issues, irregular
field shapes (See tile, terrace maps, aerial
photos)
5. Most recent 5-Year Actual/Average Yields on
that farm (Corn & Soybeans).
Source: Johnson, ISU Extension, May 2011
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Method #1:
What’s the “going” rate?
• Rumors often inaccurate.
• Compare to many others,
not just one
• Remember, seemingly
small differences in land
quality can make a big
difference in appropriate
rents.
Location: Winneshiek County Tillable Acres in parcel: 75 Acres Corn Yield: 167 bu/Acre Soybean Yield: 45 bu/Acre These are the yields on that farm/parcel – ideally, a 5-year rolling average. Corn Suitability Rating: 82 CSR2
Let’s take an Example . . . a fictional
parcel in Winneshiek County:
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►Start at page 37, then go to appropriate
District page (1, 2, 3 etc)
►Example parcel in Winneshiek–page 41
►Determine Overall as well as High, Middle,
Low averages for county
►Determine where your parcel fits
►Select an appropriate figure from the
survey information
►Note on “Example” parcel – CSR2 is high,
but yields a little below average.
Method #1: Typical Cash Rent
p 41
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Method #1: Typical Cash Rent . . . continued . . . .
• “Example” parcel – CSR2 (82) is higher than
county average (78); but yields (167 & 45) are
a little lower than county average (174-corn;
50-beans).
• Winneshiek County “high quality” rent is
$286, medium quality rent is $245.
• Average ($286 + $245) /2 = $265.60
• We’ll use $266 as a “typical” rent for this
parcel, based on the ISU survey.
Method #2: Average Rents per Yield
(corn & beans) • Corn Yield calculation
• Parcel’s average corn yield = 167 bu/A • Times rent per bushel of Corn yield $ 1.40
• Average Rent for Corn Acres: $ 233.80
– 167 X $1.40 = $233.80
• Soybean Yield calculation
• Parcel’s average bean yield = 45 bu/A • Times rent per bushel of bean yield $ 4.86
• Average Rent for Bean Acres: $ 218.70
– 45 X $4.86 = $218.70
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Method #2: Average the corn &
bean calculations
•Average Rent for Corn Acres: $ 233.80
•Average Rent for Bean Acres: $ 218.70
•($233.80 + $218.70) / 2 = $226.25 ($226)
•Average Rent, Corn & Soybean Acres: $226
Method #3: Corn Suitability
Rating calculation
• Corn Suitability Rating calculation
• Parcel’s CSR2 = 82 • Times rent per CSR index point $ 3.12
• Average Rent for Corn Acres: $ 255.84
– 82 CSR X $3.12/CSR point = $255.84 ($256)
– Rent based on CSR2 only = $256
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Method #4: Rent based on Return
on Value/Investment • Market value of
cropland/parcel = $/acre
• Winneshiek County average:
$7,054 (ISU Survey-Dec 2015)
• “My” Parcel value = $7,200
• Desired return on value =
2.75%
• $7,200 X 2.75% = $198/acre
($198)
Source: ISU Extension Publication FM-1851
Average of all 4 Methods
Method 1: Typical Cash Rent $ 266
Method 2: Average Rent per yield $ 226
Method 3: Average Rent per CSR2 Point $ 256
Method 4: Return on Investment/Value $ 198
Average $236.50 /acre
$236.50 /A X 75 Tillable Acres =$17,737.50
But – we don’t stop here. Consider . . . .
Overall Average Method
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See p37
in
Leasing
book:
Additional Methods of Farmland
Lease Valuation ? – See your
book on page 69—Flexible Farm
Lease Agreements:
5. Gross Income Method
6. Tenant Residual Method
7. Crop Share Method
Crop Share Equivalent Method: See book pages 66-67 for discussion and an example.
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Landlord Tenant
Land
½ inputs
Labor
½ inputs
Machinery
Management
½ income ½ income
Crop Share 50-50 Lease
Landlord Tenant
Land $105
½ inputs $195
Labor $ 31
½ inputs $195
Machinery $ 92
Management - $ 18
½ income $300
½ income $300
Crop Share Corn Lease 2016 Corn
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Landlord Tenant
Land $146
½ inputs $ 81
Labor $ 27
½ inputs $ 81
Machinery $ 72
Management $ 47
½ income $227
½ income $227
Crop Share 50-50 Lease 2016 Soybean
Other Flexible
Cash Rent
Examples:
• File C2-22 on
Ag Decision
Maker
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Share of Gross Income
CORN: (151 bu X $3.97) = $ 599
SOYBEANS: (46 bu X $9.85) = $ 453
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
CORN: $ 599/ ac x 30% = $ 180
SOYBEANS: $ 453/ ac x 40% = $ 181
Average $ 180
Tenant Residual Method
CORN: $ 599- $ 572 = $ 27
SOYBEAN: $ 453 - $ 321 = $ 132
Average: $ 80
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Cash Rent Survey
Per Bushel Yield
Per CSR Point
Return on Investment
Gross Income
Tenant Residual
Crop Share
Average
Corn Soybeans
$242 $242
$242 $239
$242 $242
$195 $195
$180 $181
$ 27 $132
$195 $ 81
$188
Other Resources: Inside Back
Cover of Your Book
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49
Thank-you! Please contact ISU Extension
with your Farm Management questions!
Melissa O’Rourke B.S., M.A.,
J.D.
FARM & AGRIBUSINESS MANAGEMENT
SPECIALIST
Housed at ISU Extension—Winneshiek
County in Decorah
www.extension.iastate.edu/agdm
[email protected] 563-382-2949