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Lunch & Learn

Lunch & Learn. Farmland Leasing Update December 10, 2003 Craig Dobbins. Leases Used for Indiana Cropland. Approximately 58.9% of Indiana farmland is leased Cash lease – 47.7% of leased acres Share lease – 20.0% of leased acres Cash/share – 24.4% of leased acres

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Lunch & Learn

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  1. Lunch & Learn Farmland Leasing Update December 10, 2003 Craig Dobbins

  2. Leases Used for Indiana Cropland • Approximately 58.9% of Indiana farmland is leased • Cash lease – 47.7% of leased acres • Share lease – 20.0% of leased acres • Cash/share – 24.4% of leased acres • Adjustable cash lease – 5.9% of leased acres

  3. What can I pay for cash rent? + Market Revenue + Government payments - Crop production costs - Machinery ownership - Labor and management = Residual for land

  4. Rent = $125

  5. Cash Rent 1975 - 2003

  6. Cash Rent 1975 - 2003 June Average Land Cash Rent - Reported (Nominal) & Adjusted for Inflation (Real)

  7. Survey • Conducted in June of each year • Survey professionals in the farm real estate market – land brokers, appraisers, farm managers, ag lenders, FSA, extension educators, farm operators • Ask people to report for top, average, and poor cropland • Long-term average or typical corn yields • Market value of bare cropland • Market value of land which is moving into non-agricultural uses • Bare cropland cash rent

  8. Property Tax Reassessment • Use value approach • Estimates of income to land 1995-98 • Net operating income ranged from $56 - $131 per acre • Cash rent ranged from $88 - $102 per acre • Capitalization rate • Varied from 9.10% to 9.92% • Based on average annual interest rate on agricultural real estate and production loans • Land Value = Income to land ÷ cap rate • Adjust for productivity based on corn yield • Adjust for other factors such as flooding • Process explained http://www.in.gov/dlgf/reassessment/approved_manuals/manualA/book1/bk1ch2d.PDF

  9. Property Tax Reassessment • Agricultural base rate of $1,050 per acre up from $495 per acre • Tax bills are larger 20%, 25%, ?????? • Will this cause cash rents to jump up? • Will tenants be willing to pay more? • What will the market support?

  10. Crop-Share Lease Principles • Remember the risk - return tradeoff • The more risky alternative needs to provide higher average return • For an equitable crop-share lease, parties share total returns in the same proportion as they contribute to production

  11. Land Owner Contribution $141.25

  12. Tennant Contribution

  13. Crop-Share Lease Principles • As new technologies are adopted, share arrangements need to be adjusted to reflect their impact on costs and returns • Variable expenses which are yield increasing should be shared in the same percentage as the crop share

  14. Cost Shares for 50-50 Share-Lease, Central Illinois Source: University of Illinois, 1998

  15. Lease Terms in 50-50 Share-Lease Source: University of Illinois, 1998

  16. Lease Terms in 50-50 Share-Lease Source: Iowa State University Extension, 1993

  17. Lease principles • Tenants and/or landowners should be compensated at the termination of the lease for the unexhausted portion of long-term investments

  18. References • Historical cash rent and land values from Purdue Land Value Survey – PAER Archive • http://www.agecon.purdue.edu/extension/pubs/paer/archive.asp • Estimated Indiana Crop Budgets - ID-166 • http://www.agecon.purdue.edu/extension/pubs/crop_guide_03.pdf • Indiana Cash Farm Lease EC-257 • http://www.ces.purdue.edu/extmedia/EC/EC-257.pdf

  19. References • Fixed and Flexible Cash Rental Arrangements for your Farm, NCR-75 • Cash Farm Lease with Flexible Provisions form, NCR-76* • Crop-share or Crop-share/Cash Farm Lease form, NCR-77* • Crop-share or Crop-share/Cash Rental Arrangements for your Farm, NCR-105 • Irrigation Crop-share or Crop-share/Cash Farm Lease form, NCR-106* • Irrigation Crop-share and Cash Rental Arrangements for your Farm, NCR-148 https://www.mwpshq.org/catalog.html

  20. References • Estimating cash rents • http://www.extension.iastate.edu/Publications/FM1801.pdf • http://www.farmdoc.uiuc.edu/manage/pdfs/lsf_cash_rents.pdf • Crop-share lease terms • http://www.extension.iastate.edu/agdm/wholefarm/pdf/c2-30.pdf • http://www.farmdoc.uiuc.edu/manage/pdfs/srlc_nei.pdf • http://www.farmdoc.uiuc.edu/manage/pdfs/srlc_sei.pdf • http://www.farmdoc.uiuc.edu/manage/pdfs/srlc_ci.pdf

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