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

morourke@iastate.edu 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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Northeast counties – 2014 &

2015 farmland values

Percent Change – 2014 to 2015

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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

• E-mail

• 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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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

morourke@iastate.edu 563-382-2949