Key Topics Today: What changes do you intend on making to your 2017 - - PDF document

8/15/2017 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 Office phone: 563-382-2949

Wright Worth Woodbury Winnebago Webster Washington Warren Union Tama Story Sioux Shelby Scott Sac Ringgold Poweshiek Polk Pocahontas Plymouth Palo Alto Osceola O'Brien Mus- catine Monona Mitchell Marshall Marion Mahaska Madison Lyon Lucas Louisa Linn Lee Kossuth Keokuk Jones Johnson Jefferson Jasper Jackson Iowa Ida Humboldt Howard Henry Harrison Hardin Hancock Hamilton Guthrie Grundy Greene Franklin Floyd Emmet Dickinson Des Moines Decatur Dallas Crawford Clinton Clay Clarke Chickasaw Cherokee Cerro Gordo Cedar Carroll Calhoun Butler Buena Vista Bremer Boone Black Hawk Benton Audubon Wayne Wapello Van Buren Monroe Davis Appanoose Winneshiek Fayette Dubuque Delaware Clayton Buchanan Allamakee Taylor Pottawattamie Page Mont- gomery Mills Fremont Cass Adams Adair

SE CB MO

Lucas

TE SJ RD GW

Farm Management Field Specialists

Key Topics Today:

► Trends in . . . –Farm land values –Cash rental rates ► Costs of crop production -- resources ► Negotiating a fair cash lease rate ► 2018 Farm Leasing Considerations: –Communications –Legal issues –. . . And much more!

What changes do you intend on making to your 2017 farmland lease arrangements, or lease arrangements you influence?

3% 5% 6% 9% 9% 10% 14% 16% 20% 39% 44% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Increase rent Apply for Beg. Farmer or Custom Farming Tax… Does not apply (not directly involved in lease… File and perfect a landlord's lien Move from an oral lease to a written lease… Change type of lease No changes will be made Other Implement conservation strategies Improve communication with other parties Decrease rent Percent of responses

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.

Let’s get familiar amiliar with ith your

• ur Far

armland mland Leas Leasing ing Ar Arran ange geme ments nts book! book!

8/15/2017 2

ww www.exte tension.iasta tate te.edu/a /agdm

Get familiar with Ag Decision Maker!!

Program Purpose

• Created in 2009 to encourage

agricultural asset owners to lease to qualifying beginning farmers.

• Provides asset owner with

credit on Iowa income taxes.

• Beginning Farmer must have

low – moderate net worth. For 2017 – the cap is $645,284.

• Financial statement required

with application.

For this Iowa program, the Beginning Farmer must . . .

• Have education, training and/or

experience for the type of farming required for the lease.

• Make all operational & managerial

decisions

• Perform labor necessary to fulfill lease

conditions.

• Have access to working capital, farm

equipment, machinery and/or livestock to fulfill the lease.

• Be responsible for all financial

expenses necessary to lease and manage the property.

Basic Provisions: Tax Credit Calculations for 2017

• Cash lease – 7%
• Cash/flex lease – 7% on

base rent amount (but not the bonus)

• Crop Share –17% of asset
• wner’s share of the crop
• 1% bonus for military

veterans

• Examples on the website.

Example: xample: Calcula Calculating ting Cas Cash h Rent ent Tax ax Cr Credit edit for

• r 2017

2017

• 160 acres cash rented
• $250 per acre
• $40,000 gross lease

income

• $40,000 x 7% = $2800

Iowa income tax credit

• Can be used for flexible

& crop-share leases too.

8/15/2017 3 What about 2018?—Changes down the road . . . . .

• 2017 Iowa Legislature failed to act.
• Unless 2018 Legislature acts, big

program changes.

• Cash lease credit –  to 5%
• Crop Share –  to 15% of asset
• wner’s share of crop
• NO 1% bonus for military veterans
• Custom Farming Contract Tax Credit program

created in 2013 will expire in 2018. (Taxpayer hiring Beginning

Farmer to complete agricultural contract work for production of crops or livestock may qualify for a tax credit of 7% of the custom contract amount (8% for veterans)).

For

• r Mor

More Inf e Infor

• rma

mation ion and and to

• Appl

pply: y:

• See 3-page application and

instructions at:

• IowaFinanceAuthority.gov
• For 2017 Crop Year:

applications accepted until the limit of $6 million in tax credits is reached –or– September 1, 2017 (whichever occurs first).

• Beginning farmer’s financial

statement

• Beginning farmer’s

background letter

• Fees = start at $300 and

depend on the length of the lease

What are some sources of Iowa Farmland Value Data?

Why is it important for Farmland Owners and Farm Producers to think about farmland values?

County Assessors’ Offices

• Some county assessors maintain public (Pdf or Excel

spreadsheet) document of ag land sales:

• http://siouxcounty.org/wp-content/uploads/2016/05/agsales.pdf

8/15/2017 4

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

FARMLAND VALUES AND CREDIT CONDITIONS Summary In the first quarter of 2017, agricultural land values for the Seventh Federal Reserve District were unchanged from a year ago—the first pause in the current downturn since the third quarter of 2015. Moreover, “good” farmland values in the first quarter of 2017 were largely the same as in the fourth quarter of 2016, according to the survey responses of 198 District agricultural

• bankers. Cash rental rates for District farmland continued their decline in 2017, falling 7

percent from 2016. The demand to purchase agricultural land in the three- to six-month period ending with March 2017 was lower than in the same period ending with March 2016. Additionally, the amount of farmland for sale, the number of farms sold, and the amount of acreage sold were down during the winter and early spring of 2017 compared with a year

• ago. The responding bankers leaned heavily toward the view that farmland values would

remain stable during the second quarter of 2017—a shift from the sentiment that farmland values would continue to decline held widely a year earlier.

AgLetter

Federal Reserve Bank of Chicago

Realtors Land Institute

–Semi-annual survey (March and September) –Compares land classification by corn production –Most recent survey always available on Ag Decision Maker

March 2017 RLI Survey

8/15/2017 5

http://usda.mannlib.cornell.edu/usda/current/AgriLandVa/AgriLandVa-08-03-2017.pdf

• Dollars/acre

and percent change from 2016

“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

Timely topics in Newsletters – free to you on Ag Decision Maker

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 23

“The survey is intended to provide information on general land value trends, geographical land price relationships, and factors influencing the Iowa land market. The survey is not intended to provide a direct estimate for any particular piece of property.”

http://www.card.iastate.edu/land-value/

Land Value Survey Publication - Book Page 23

8/15/2017 6

2015 and 2016 Farmland Values

Northeast counties – 2015 (bottom #) & 2016 (top #) farmland values

Percent change – 2015 to 2016

Crop Reporting District 3  Crop Reporting  District 2

8/15/2017 7

Farmland Value per Acre 1970-2016

$0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Land value per acre ($/acre)

Farmland Value per Acre 1950-2015

2000 4000 6000 8000 Land value per acre ($/acre)

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% Average Land Value per Acre Percent of Sales Farmers Investors Average Land Value

SUMMARY: Land Value Survey

• The 5.9% decline is still modest and actually lower than the

rate many expected to see.

• Average farmland values hit a historic peak of $8,716 per

acre in 2013, but declined 8.9% in 2014, 3.9% in 2015, and have now fallen an additional 5.9%.

• While they have declined three years in a row now, current

Iowa farmland values are still more than double what they were 10 years ago, 64% higher than the 2009 values and 7% higher than the 2011 values.

• From landowner’s perspective, with land values at the county

level dropping 2 to 9 % across Iowa, landowners could still potentially make money with cash rent payments, which typically account for about 2 to 4 % of land values.

• Farm income & interest rates are key to watch
• For more info visit www.card.iastate.edu

Landlord-Tenant Communication: It’s a 2-way street

• Farmland owners need to be
• pen to learning about current

farming challenges, conditions, costs of productions

• Producers need to listen to the interests and goals
• f farmland owners; and be willing to share

information about inputs, yields, and crop plans

Communica Communication tion Methods ethods:

• 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.

8/15/2017 8 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.

On Ag Decision Maker – an August 2016 article from the AgDM newsletter . . . Thoughts on Farm Newsletters. New ewsl slet etter ers ca can be n be si simpl mple e

• r fancy

y . . . . Post

• sted

ed on

• n a

a websi bsite, e, sent sent by by Emai mail or

• r US

Mail ail . . . . Or thr hrou

• ugh

gh ot

• the

her so social me media si sites. es.

• Page 91:
• Annual Reports:
• Own

wner r agrees: Info provided by the Tenant is kept co confi nfide denti tial. al.

• Proprietary

business information needs to be shared to negotiate lease terms – but it is not to be shared in the “coffee shop.” Iowa Farmland: Keeping it “in the family” – Communication through the generations:

Mom & Dad: Own a section—640 acres 4 Kids – Allan Bill Cathy Donna Equal Shares—25% each Allan: To 4 kids equally, each

• wn 6.25% of

640 acres Bill: To 5 kids equally, each

• wn 5% of 640

acres Cathy: To 3 kids equally, each own 8.333% of 640 acres Donna: 0 kids, leaves to the church (25% share) (and church wants to sell) ► Do any of the “kids” live in Iowa? ► Who is the farm manager? ► If you’re the Owner, what do you want to see in your farm producer – tenant? ► If you’re the Producer tenant – what do you want to see in the Owner - Landlord

8/15/2017 9 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

Negotiation 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

Far arm m Leas Lease e Bas Basics ics: : A A Few ew Pointer

• inters
• Strong preference for

written leases – See your book – page 88 (short form)

• Legal issues, including

lease termination

• Communication

fundamentals

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!

Why hy shou should d a f a far arm m lea ease se be be written en?

• Provides more assurance

that the parties understand

• ne 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.

A A Few Examples ew Examples . . . .

• Fencing
• Hunting rights
• Crop residue

(stover)

8/15/2017 10

As Assuri uring ng the he Ren ent is is Paid aid

• How can parties

assure one another that the rent will be paid?

First st Step tep? ? --

• - Use

se a wr writt tten lease se.

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.

Ad Additio ditiona nal l too tools ls to to ass assur ure e ren ent t pa payment yment may may inc include: lude:

• 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.

Farm m Lease Termin mination: Does

s lease se termi mination me mean the end of the Owner–Tenant relationsh ship?

• Not necessarily – but it means

either the Owner (or the Tenant) want to make some changes for the next year.

• See your book – page 95

 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.

Turn to to page 31 in your r 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.

8/15/2017 11

Average/Typical Cash Rents for Corn & Soybean Acres – p 32

What is the Iowa Nutrient Reduction Strategy?

• Voluntary, science-based program to

reduce Nitrogen and Phosphorous impact

• n water
• Includes cities, industry and agriculture
• A practice-based approach to show

meaningful and measureable progress

• A framework for innovation and verification
• f new practices and technologies

Financial Impact?

If cover crops result in a decreased level

• f 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

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

• r producing a product.
• Land
• Crop Inputs
• Machinery
• Labor
• Page 72 – starting point for cost of

production data.

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

 Used as a gauge for planning purposes by ag businesses and financial institutions  Page 72 in your book . . .

8/15/2017 12

Fixed Cash Lease – Determining a “Fair” Rental Rate

http://www.card.iastate.edu/ag_risk_tools/cash-rental-rates/

Interactive Decision Tool

Computing a Cropland Cash Rental Rate – see page 59

• 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

Do you know the yields on your parcels – whether you’re the landowner or the producer/tenant? See pages 68-69 . . .

Method #1: What’s the “going” rate?

• Rumors often inaccurate.
• Compare to many others,

not just one

• Seemingly small

differences in land quality can make a big difference in appropriate rents.

8/15/2017 13

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:

►Start at page 31, then go to appropriate District page (1, 2, 3 etc) ►Example parcel in Winneshiek–page 35 ►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 35

Method #1: Typical Cash Rent

. . . continued . . . .

• “Example” parcel – CSR2 (82) is higher than

county average (78); but yields (167 & 45) are lower than county average (179-corn; 52- beans).

• Winneshiek County “high quality” rent is

$265, medium quality rent is $231.

• Average ($265 + $231) /2 = $248
• We’ll use $248 as a “typical” rent for this

parcel, based on the ISU survey.

p 35

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

$ 1.30

• Average Rent for Corn Acres:

$ 217.10

– 167 X $1.30 = $217.10

• Soybean Yield calculation
• Parcel’s average bean yield = 45 bu/A
• Times rent per bushel of bean yield

$ 4.46

• Average Rent for Bean Acres:

$ 200.70

– 45 X $4.46 = $200.70

8/15/2017 14 Method #2: Average the corn & bean calculations 

• Average Rent for Corn Acres:

$ 217.10

• Average Rent for Bean Acres:

$ 200.70

• ($217.10 + $200.70) / 2 = $208.90 ($209)
• Average Rent, Corn & Soybean Acres: $209

p 35

Method #3: Corn Suitability Rating calculation

• Corn Suitability Rating calculation
• Parcel’s CSR2 = 82
• Times rent per CSR index point $ 2.97
• Average Rent for Corn Acres:

$ 243.54

– 82 CSR X $2.97/CSR point = $243.54 ($)

– Rent based on CSR2 only = $244

Method #4: Rent based on Return

• n Value/Investment
• Market value of

cropland/parcel = $/acre

• Winneshiek County average:

$6,592 (ISU Survey-Nov 1, 2016)

• “My” Parcel value = $7,200
• My Desired return on value =

2.9%

• $7,200 X 2.9% = $208.80/acre

($209)

2.9% Return

• n Value?—

where does that come from?? See your book – Page 43 Check the column – Rent as % of Value

Source: ISU Extension Publication FM-1851

Average of all 4 Methods

Method 1: Typical Cash Rent $ 248 Method 2: Average Rent per yield $ 209 Method 3: Average Rent per CSR2 Point $ 244 Method 4: Return on Investment/Value $ 209

$910/4 = Average $227.50 /acre

$227.50 /A X 75 Tillable Acres =$17,062.50 But – we don’t stop here. Consider . . . .

Overall Average Method

8/15/2017 15

Se See p31 p31 in Leasing book: book:

• r landlord!

Also Consider Costs of Production

Whether you are the landowner or the producer/tenant – the costs

• f production need to be

considered.  The arrangement must “work” for both the Owner and the Tenant.  Page 72 in your book . . . These are estimates – actual costs are even better.

Ad Additional ditional Methods ethods of

• f F

Far armland mland Leas Lease e Valua aluation tion ? – See ee your

• ur

book book on

• n pa

page ge 63 63—Fle lexible xible Far arm m Leas Lease e Ag Agreements eements:

► Share of Gross Revenue ► Base Rent Plus Bonus

We’ll also look at Crop Sha Share Equ Equiva valent Method: See See book page 61 for disc scussi ssion and an examp mple.

Share of Gross Revenue – Page 63: Base Rent plus a Bonus – page 64:

Crop Share Equivalent Rent

Page 61

8/15/2017 16

Landlord Tenant Land ½ inputs Labor ½ inputs Machinery Management ½ income ½ income

Crop Share 50-50 Lease

Other Flexible Cash Rent Examples:

• File C2-22 on

Ag Decision Maker  Other Resources: Inside Back pages 98-99

• f Your Book

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 Office phone: 563-382-2949

www.extension.iastate.edu