Land Rent – Base or Bubble?
What is fair?
What are my options?
Changing Rent Picture
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Higher price per bushel
New level of yields
Increased input costs
Higher land values
Market prices
• While not at record levels, prices are
at the upper levels of where they
have been for a number of years.
• Is it a bubble or a new level?
• Maybe this one we can blame on
ethanol
% of
Time
Corn
Current $
Price
25 Yrs.
15 Yrs.
10 Yrs.
5 Yrs.
Current $
$ 3.50
0%
0%
0%
0%
$ 3.25
1%
0%
0%
0%
$ 3.00
7%
3%
4%
4%
$ 2.75
13%
9%
9%
8%
$ 2.50
32%
24%
22%
15%
$ 2.25
54%
46%
39%
39%
$ 2.00
73%
73%
61%
65%
$ 1.75
86%
91%
86%
98%
$ 1.50
92%
95%
92%
100%
$ 1.25
93%
95%
92%
100%
$ 1.00
100%
100%
100%
100%
% of
Time
Soybeans
Current $
Current $
Price
25 Yrs.
15 Yrs.
10 Yrs.
5 Yrs.
$
9.00
1%
0%
0%
0%
$
8.50
1%
0.20%
0.40%
0%
$
8.00
4%
3%
5%
2%
$
7.50
12%
8%
12%
7%
$
7.00
20%
17%
22%
11%
$
6.50
29%
28%
34%
20%
$
6.00
47%
42%
41%
30%
$
5.50
72%
70%
56%
50%
$
5.00
85%
80%
70%
68%
$
4.50
93%
93%
89%
89%
$
4.00
95%
96%
93%
91%
$
3.50
100%
100%
100%
100%
Crop yields
• Before 2002 corn yields never above
170 bu per acre
• 2002 and after only once below 170
bu per acre
• The role of genetics
• New level or just good weather?
Corn Yield
200
150
150.2
168.9
170.2
156.7
145.9
140.4
1999
2000
2001
159.0
175.9
190.1
182.3
2004
2005
2006
100
50
0
1997
1998
2002
2003
Corn
Return Per Acre
220.00
120.00
155.37
55.80
12.35
20.00
34.84 37.56
-6.81
54.59
-11.44
-80.00
1997
1998
56.22
1999 2000
-48.70
2001
2002 2003
2004 2005
2006
Input costs
• Higher oil costs affecting:
– Fuel costs
– Fertilizer costs
– Chemical costs
• World Issues
– China
– Less competition
• Costs of new seed genetics
Land values
• Value of cropland increasing
significantly
• Cash rents are going up
• How high can cash rents go?
What is fair?
• The Market Approach
• Landowner: Desired return Approach
• Renter: How much can I afford to
pay Approach
• Flexible Cash Rent Approaches
Market Approach
• Cash Rent is going up double digit
Desired Return Approach
• Would like to have a 6% rate of
return on investment
– $4,500 X 6% = $270
– Rates have fallen from 6% in middle 90’s
to 3.5 – 4.0% today
Desired Return Approach
2003-2007
Real Estate
Value Increase
73.8%
Cash Rent
Increase
14.7%
2006-2007
15.8%
6.8%
2005-2006
14.3%
1.7%
2004-2005
16.7%
3.6%
Source: Land Values and Cash Rents 2007 Summary, NASS, USDA
Fair Rent costs
Crop
Corn
Soybeans
Acres
Expected yield
Expected price
Transition payments
Other income
Gross return
500.00
500.00
170.00 bu. 45.00 bu.
3.20
8.75
18.00
18.00
562.00
411.75
Fair Rent Costs
Direct expenses
Seed
Fertilizer
Chemicals
Crop insurance
Drying
Custom hire
Direct crop labor
Fuel
Repairs
Other direct expense
Operating interest
Interest on rent
Total
Overhead expenses
Operator labor & mgt.
Total listed costs
Corn
78.00
96.00
20.00
18.00
20.00
25.00
35.00
20.00
10.00
10.00
332.00
40.00
30.00
402.00
Soybeans
39.00
15.00
20.00
18.00
20.00
30.00
20.00
8.50
10.00
180.50
40.00
30.00
250.50
Sensitivity tables
20 % 10 % Expected 10 % 20 %
Lower Lower Yields Higher Higher
Income Income & Prices Income Income
--------- -------- --------- --------- --------
To cover
direct expenses $137
To cover direct &
overhead expenses 97
To cover labor &
mgt (all costs)
67
184
231
278
324
144
191
238
284
114
161
208
254
Sensitivity Table
Income Remaining For Cash Rent Per Acre: Corn
Price
Per bu.
2.56
2.88
3.20
3.52
3.84
Yield Per Acre
136.0 153.0 170.0 187.0 204.0
------- -------- ------- -------- ------$-36
8
51
95
138
8
57
106
155
204
51
106
160
214
269
95
155
214
274
334
138
204
269
334
399
Sensitivity Table
Income Remaining For Cash Rent Per Acre: Soybeans
Price
Per bu.
7.00
7.88
8.75
9.63
10.50
Yield Per Acre
36.0
40.5
45.0 49.5
54.0
------- ------- -------- -------- -------20
51
83
114
146
51
86
122
157
193
83
122
161
201
240
114
157
201
244
287
146
193
240
287
335
Sensitivity Table
Income Remaining For Cash Rent Per Acre: Average of
All Crops
Yield Per Acre
Price
- 20 % - 10 % Expected + 10 % + 20 %
------- -------- ---------- --------- --------- 20 %
-8
29
67
104
142
- 10 %
29
72
114
156
198
Expected 67
114
161
208
254
+ 10 %
104
156
208
259
311
+ 20 %
142
198
254
311
367
Selecting a Land Rental
Agreement
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Weather and Price Risk Assumed
Degree of Landowner Involvement
Capital required
Management Involvement
Marketing Responsibility
Variability in Returns
Factors Influencing
Rental Value of a Farm
• Location of Farm
– Crops Grown/Markets available
– Supply and Demand of Rented Land
• Productivity of Farm
– Soil Type
– Drainage
– Fertility Level
Factors Influencing
Rental Value of a Farm
• Size of Fields
• Previous crops grown and chemicals
used
• FSA Base and Yield
• Building availability and use
• Payment provisions
– Total/Tillable/Harvestable Acres
– Payment Dates
What are my options
• Cash Rent
• Share Rent
• Flexible Rent
Flexible Rent Options
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Base Rent plus Bonus
Flex for Price
Flex for Yield
Flex for Combination
Be aware of FSA rules regarding
flexible leases viewed as share rent
Why some farmers are
willing to pay higher rents
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Produce higher return crops
Expect higher yields than average
Expect higher price than average
Lower production costs
Averaging land costs
Willing to work for less money
Live off depreciation
Previous rent history with landlord
Earn the right to rent
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Communicate
Be honest
Be respectful of landlord wishes
Do the little things
Sacrifice quick profit for long-term
prospect of renting more land
• Practice give and take – win some,
lose some
Put your agreement into
writing
• Encourages detailed statement of
things agreed upon
• Serves as a reminder of things
agreed upon in you have problems
• Guide to heirs if farm operator or
landlord dies
Essential Provisions of
written lease
• Name and addresses of participants
• Period of
agreement/renewal/cancellation
• Description of property
• Payments: amounts and when
• Signatures
Land Rent –
Base or Bubble??
• Maybe some of both
• Thank you
Peter Scheffert
Riverland Community College
507-649-1347
[email protected]