Farm Leasing Arrangements
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Transcript of Farm Leasing Arrangements
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Farm Leasing Arrangements
Tim EggersField Agricultural Economist
712-542-5171
www.extension.iastate.edu/feci
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Agenda• Iowa Nutrient Reduction Strategy• Flexible cash leases• Landlord liens• Agricultural Act of 2014• CSR2 use • Bioenergy (CENUSA, POET, DUPONT)• Beginning Farmer Tax Credit• Trends in
– Farm land values– Cash rental rates– Costs of Production
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Situation• Increasing concern about the quality of
local and regional waters• Substantial demand for agricultural
products• 2008 Hypoxia Action Plan
– development and implementation of N and P reduction strategies for Mississippi/Atchafalaya River Basin states
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Cost of Lost Soil and Nutrients
• Loss of in-field productivity
• Off-site water quality impacts, locally and in the Gulf of Mexico
• Eventual decline in land value
Duffy, 2013
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Why? And why now?• Iowa’s productive soils and cropping systems
also contribute to water quality concerns• Society and EPA expect more from cities,
industry and agriculture• Gulf Hypoxia Task Force requires plan to
reduce N and P load to Gulf by 45%• EPA requests strategy that emphasizes state
implementation of new and existing N and P practices for point and non-point sources
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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
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Can we achieve the nutrient reduction goals for Gulf of Mexico Hypoxia?
• Not simple – Not as simple as just fine-tuning
nutrient management
• Not impossible
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Many Options
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Nitrate-N Reduction Practices
Practice % Nitrate-N Reduction [Average (Std. Dev.)]
% Corn Yield Change
Nitrogen Management
Timing (Fall to spring) 6 (25) 4 (16)Nitrogen Application Rate (Reduce
rate to MRTN) 10 -1
Nitrification Inhibitor (nitrapyrin) 9 (19) 6 (22)
Cover Crops (Rye) 31 (29) -6 (7)
Land Use
Perennial – Pasture/Land retirement 85 (9)
Perennial – Energy Crops 72 (23)
Extended Rotations 42 (12) 7 (7)
Edge-of-Field
Controlled Drainage 33 (32)*
Shallow Drainage 32 (15)*
Wetlands 52
Bioreactors 43 (21)
Buffers 91 (20)**
*Load reduction not concentration reduction**Concentration reduction of that water interacts with active zone below the buffer
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Phosphorus Reduction Practices
Practice% Phosphorus-P
Reduction [Average (Std. Dev.)]
% Corn Yield Change
Phosphorus Management
Producer does not apply phosphorus until STP drops
to optimal level17 (40) 0
No-till (70% residue) vs. conventional tillage (30%
residue)90 (17) -6 (8)
Cover Crops (Rye) 29 (37) -6 (7)
Land UsePerennial – Land retirement 75 (-)
Pasture 59 (42)
Edge-of-FieldBuffers 58 (32)
Terraces 77 (19)
Assessment did not include stream bed and bank contributions although recognized as significant
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Nutrient Value of Lost Soil
• Each ton of soil contains an estimated– 2.32 pounds of Nitrogen @ $0.44 per pound – 1 pound of Phosphorus @ $0.43 per pound
• Value in nutrients = $1.45 per ton of soil• Average Iowa farm is 333 acres• $2,414 in lost nutrients alone, per year
Duffy, 2013
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Summary• To achieve goals will require a
combination of practices – conservation systems approach
• N versus P may require different practices• Multiple benefits and costs of practices
need to be considered• Targeting of practice placement will be
critical (Precision Conservation)
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2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
90
110
130
150
170
190
210
230
250
270
Crop Share
Cash
Flex Rent
$ per acre
Crop Share vs Cash vs Flex
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Flexible Cash Lease
• Rent is paid in cash• Actual rent paid each year is determined
by a formula that includes any or all of:– Actual price– Actual yield– Costs of production
• Also called “variable” cash leases
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Reasons for Flexible Leases
• Fewer landowners and tenants want to be involved in crop share leases
• Still recognize a need for sharing risk• Prices and yields have been volatile in
recent years• Cash rents have lagged behind profits in
crop production• Neither party enjoys renegotiating annually
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Direct Corn Expenses
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200Seed Insecticide Herbicide Fertilizer & Lime Drying & Storage
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Direct Bean Expenses
2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
10
20
30
40
50
60
Seed Insecticide Herbicide Fertilizer & Lime Drying & Storage
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Prevalence of Flexible Leases
• Iowa land tenure surveys– 1993: 3.5% of cash rented acres– 2003: 11% of cash rented acres– 2007: 12% of cash rented acres– 2012: 16% of cash rented acres
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Types of Flexible Cash Farm Leases
• Option A: Rent = % of gross revenue• Option B : Rent = base rent + bonus
– Bonus = (Gross Crop Revenue – Base Crop Cost Estimate) x %
– Base Crop Cost Estimate = Input costs + Base rent
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2010 2011 2012 2013 2014* $150
$170
$190
$210
$230
$250
$270
$290
$310
$330
$350
Base RentPercent of GrossBase Rent + Bonus
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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.
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Landlord’s Lien Law• Iowa’s Landlord Lien Law went into
effect on July 1st, 2001– Applies to existing farm leases– Gives landowners priority in collecting rent
owed by their farm tenants– Landowner must have filed a Uniform
Commercial Code (UCC) with Secretary of State where tenant does primary business
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Landlord’s Lien Law
• Amended by the Iowa General Assembly in 2002– UCC Financing Statement, once filed,
continues to be effective until a termination statement is filed so long as the parties (landlord and tenant) remain the same.
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Landlord Lien Law
• A financing statement filed to perfect a lien in farm products must include a statement that it is filed for the purpose of perfecting a landlord’s lien.
• Must be filed with Secretary of State within 20 days of when the lease goes into effect
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Should you “do it yourself”?
• Just having the language in the lease is not enough.• Creation, filing and perfection of a Landlord Lien is
a complicated legal procedure involving intricacies of Iowa law (Iowa Code ch 570 and related sections) and Uniform Commercial Code (UCC) (Iowa Code ch 554).
• Owner-Landlords who wish to do this may find it advisable to hire an attorney to be certain that all legal documents and procedures are correctly followed.
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https://sos.iowa.gov/business/FormsAndFees.html#UCC
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The Agricultural Act of 2014
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Base AcresKeep current base acres or do a one-time
“reallocation” of base acresReallocation allowed to covered
commodities planted between 2009 and 2012
Reallocation in proportion to the ratio of 4-yr average plantings/prevented plantings
Total number of base acres limited to total of existing base acres
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Payment YieldsKeep current CCP payment yield or do a
one-time “update” of payment yield on a commodity-by-commodity basis
Update: 90% of 2008-2012 yield per planted acre on the farm
If the farm yield is below 75% of the 2008-2012 average county yield, then the farm yield is replaced by 75% of the 2008-2012 average county yield
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Price Loss Coverage (PLC)Price-based support program
Works like CCP
Payment rate = Max(0, Reference price – Max(Marketing year average price or
Loan rate))
Reference prices are:Corn $3.70, Soybeans $8.40
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PLC vs. CCP and DP
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Agriculture Risk Coverage (ARC)Revenue-based support program
Revenues based on 5-year Olympic average yields and prices
Triggers at county or individual farm level, instead of state level
ARC choice:Individual ARC: crop revenues are combinedCounty ARC: revenues are crop-by-crop
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Supplemental Coverage Option (SCO)An additional policy to cover “shallow losses”
Shallow loss = part of the deductible on the producer’s underlying crop insurance policy
SCO has a county-level payment trigger
Indemnities are paid when the county experiences losses greater than 14%
Premium subsidy: 65%
Starts in 2015
Can’t have ARC and SCO together
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Three ChoicesPLC + SCO
Price protection with top-up county-level insurance protection, paid on 85% of base
ARC-CountyCounty-level revenue protection based on
historical averages, paid on 85% of baseARC-Individual
Farm-level revenue protection based on historical averages, paid on 65% of base
Once chosen, locked in until 2018
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Two WavesFirst wave: Choice on base acreage and
yield updatingProbably occurs late summer timeframe
Second wave: Choice on farm bill programsProbably late fall/early winterHarvest the crop and farm bill at the same time
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Bioenergy Options New farm bill
pushes land out of CRP
Energy laws require more bioenergy content
Perennial grass crops provide environmental & energy benefits
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New Bioenergy Grasses Developed Liberty, a new
switchgrass variety, enters the market in 2016
Liberty yields 40% more traditional switchgrasses
Designed for bioenergy
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http://www.usda.gov/nass/PUBS/TODAYRPT/land0814.pdf
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AgLetterFederal Reserve Bank of Chicago
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Realtors Land InstituteMarch 2014 Survey
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Statewide Average
$8,716up 5.1%up $420
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High Grade Land
$10,828up 6.3%up $646
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Medium Grade Land
$8,047up 3.5%up $274
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Low Grade Land
$5,298 up 3.5%up $179
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Northwest
$10,960 up 2.8%up $83
high $12,824 med $9,918 low $6,845
down 3.9%down $445
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North Central
$9,818 up 2.7%up $258
high $11,159 med $8,824 low $6,421
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Northeast
$9,161 up 7.5%up $638
high $11,423 med $8,573 low $5,670
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West Central
$9,449 up 2.5%up $233
high $11,591med $8,725low $5,926
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Central
$9,877 up 5.5%up $512
high $11,803med $8,930low $5,918
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East Central
$9,327up 10.8%up $906
high $11,631med $8,567low $5,449
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Southwest
$7,531 up 7.4%up $517
high $9,591med $7,137low $4,592
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South Central
$4,791 up 11.2%up $483
high $7,150med $4,715low $2,843
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Southeast
$6,994 up 13.3%up $822
high $9,785med $6,605low $3,651
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POSITIVE FACTORSaffecting land values
Interest rate
s
Comm
odity prices
Good farm econom
y
Land availability
Cash available
Yields
Strong dem
and
0%
10%
20%
30%
40%
50%
60%56%
37%
24%
15% 14% 13%11%
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NEGATIVE FACTORS affecting land values
Low comm
odity prices
Weathe
r
Poor yields
Govt program
s
Uncertainty
Long term interest rate
s0%
10%20%30%40%50%60%70%80%
76%
21%
13% 11% 10% 10%
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WHO PURCHASED farmland
Investors 18%
Existing Farmers 78%
New Farmers 3%
Others1%
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WHO PURCHASED farmland
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
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SALES ACTIVITYrelative to previous year
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
0%
10%
20%
30%
40%
50%
60%
70%
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sales activity from previous yearCHANGE IN
More – 9% Less – 59%Same – 33%
More – 16%Less – 53% Same – 31%
More – 16%Less – 48%Same – 36%
More – 8%Less – 71%Same – 20%
More – 20% Less – 45%Same – 35%
More – 18% Less – 40%Same – 41%
More – 15%Less – 47%Same – 38%
More – 20%Less – 43%Same – 37%
More – 19%Less – 29%Same – 52%
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Average corn/soybean rent/acre
$294$283$281
$294 $297 $284
$257 $210 $229
UPDATE
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Other Factors• Fertility and drainage• Size and shape of fields, % tillable• USDA program bases and yields• Local grain prices and basis• Seed production contracts• Manure application contracts• Longevity of lease• “Extras” done by tenant
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Estimating a Cash Rental Rate
• Ag Decision Maker information file C2-20• Decision Aid file C2-20 (spreadsheet)
Flexible Cash Leases• Ag Decision Maker information file C2-21• Decision Aid file C2-21 (spreadsheet)
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Power Machinery Cost and Investment Cost (Per Acre)
2004 2005 2006 2007 2008 2009 2010 2011 2012 20130
50
100
150
200
250
300
350
400
450
500
Mach & Power Investment Mach & Power Cost
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1.Market Cash Rent
Page County
Overall average $ 232
High Quality Third = $ 293Middle Quality Third =$ 227Low Quality Third = $ 176
Calculating Cash Rent
UPDATE
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2 a. Average Rents Per Unit – Corn Yield
Page County
Determine Average Rent for Corn
Farm’s Average Corn Yield (bu/A) 147X rent per bushel of Corn yield $ 1.57= Average Rent for Corn Acre $ 231
Calculating Cash Rent
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
UPDATE
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2 b. Average Rents Per Unit – Soybean Yield
Page County
Determine Average Rent for Soybeans
Farm’s Average Soybean Yield (bu/A) 46 X rent per bushel of Soybean yield $ 5.10= Average Rent for Soybean Acres $ 235
Calculating Cash Rent
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
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2. Average Rents Per Unit – Corn & Soybeans
Add the Average Rent for Both
Corn Average Rent $ 231Soybean Average Rent $ 235
Average Rent Corn & Soybeans $ 233
Calculating Cash Rent
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3.Average Rents Per CSR Index Point
Page County
Determine the Average Cash Rent using CSR
Farm’s Average Corn Suitability Rating 71X rent per CSR index point $3.27= Rent for all Row Crop Acres $ 232
Using Corn Suitability Rating (CSR)
http://websoilsurvey.nrcs.usda.gov/app/WebSoilSurvey.aspx
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Return on Investment Method
Page county farm estimated to have a market value of $6,558 per acre.Expected Rent: (3.4%) X $6,558 / acre = $223 / acre
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Average all 4 Methods (Page County)
Method 1: Typical Cash Rent $ 232Method 2: Average Rents per Unit $ 231Method 3: Average Rents per CSR Index Point $ 232Method 4: Return on Investment $ 223
Average $230/A
$230 /A X 125 Tillable Acres = $28,750
Split Payments of $14,375 and $14,375
Overall Average
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Additional Methods of Farmland Lease Valuation
5. Gross Income Method
6. Tenant Residual Method
7. Crop Share Method
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Share of Gross Income
CORN: (147 bu X $5.91) + $22 = $ 891SOYBEANS: (46 bu X $12.32) + $22 = $ 589Iowa 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 RateCORN: $ 891/ ac x 23% = $ 205SOYBEANS: $ 589/ ac x 34% = $ 200
Average $ 203
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Tenant Residual Method
CORN: $ 891 - $ 552 = $ 339
SOYBEAN: $ 589 - $ 322 = $ 267
Average: $ 303
20% lower prices or yields $ 159
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Landlord Tenant
Land
½ inputs
Labor
½ inputs
Machinery
Management
½ income ½ income
Crop Share 50-50 Lease
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Landlord Tenant
Land $261
½ inputs $185
Labor $ 31
½ inputs $185
Machinery $ 92
Management $137
½ income $445 ½ income $445
Crop Share Corn Lease 2013 Corn
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Landlord Tenant
Land $213
½ inputs $ 82
Labor $ 27
½ inputs $ 82
Machinery $ 72
Management $113
½ income $294 ½ income $294
Crop Share 50-50 Lease 2013 Soybean
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Cash Rent SurveyPer Bushel YieldPer CSR PointReturn on InvestmentGross IncomeTenant ResidualCrop Share
Average
Corn Soybeans
$232 $232 $231 $235 $232 $232 $223 $223 $205 $200 $339 $267 $261 $213
$238
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