Farm Management Chapter 20 Land Control and Use.

Farm ManagementChapter 20

Land Control and Use

farm management chapter 20

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Chapter Outline

• The Economics of Land Use and Management

• Controlling Land Own or Lease?

• Buying Land

• Leasing Land

• Conservation and Environmental Concerns


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Chapter Objectives1. To explore the unique characteristics of land and

its use in agriculture2. To compare the advantages and disadvantages of

owning and renting land3. To explain important factors in land purchase

decisions, methods of land valuation, and the legal aspects of a land purchase

4. To compare the characteristics of different leasing arrangements

5. To demonstrate how an equitable share leasing arrangement can be developed

6. To discuss profitable land management systems that conserve resources and sustain the environment


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Figure 20-1Farmland values in the United States

(excludes Alaska and Hawaii)


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The Economics of Land Use and Management

Land is a permanent resource that doesn’tdepreciate or wear out. Land is immobileand cannot be moved.

Because the supply of land is essentially fixed, land prices are very sensitive to changes in demand for its products.


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Figure 20-2Average value of farmland per acre, by region


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Controlling Land Own or Lease?

How much land to control and how to acquire it are two of the most importantdecisions to be made by any farmer orrancher. Land acquisition should be thought of in terms of control. Control can be achieved by ownershipor by leasing. Nearly half of U.S. farmland is leased.


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Advantages of Ownership

1. Security of tenure

2. Loan collateral

3. Management independence and freedom

4. Hedge against inflation

5. Pride of ownership


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Disadvantages of Ownership

1. Cash flow

2. Lower return on capital

3. Less working capital

4. Size limits


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Advantages of Leasing

1. More working capital

2. Additional management

3. More flexible size

4. More flexible financial obligations


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Disadvantages of Leasing

1. Uncertainty

2. Poor facilities

3. Slow equity accumulation


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Buying Land

1. Soil, topography, and climate2. Buildings and improvements3. Size4. Markets5. Community6. Location7. Competing uses8. Agricultural program characteristics

Value is determined by:


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Land Appraisal

• Income capitalization

• Market data


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Income Capitalization

V = R

d

where R is the annual net income and d is the discount rate.

The estimated land value, V, is:


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Market Data

1. Financing arrangements

2. Relationships of buyer and seller

3. Time of sale

Prices of comparable sales are adjustedfor differences in factors contributingdirectly to value as discussed earlier. Itis also important o consider:


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Table 20-1Estimated Annual Income and Expenses

for Appraisal PurposesIncome Acres Yield (bu) Price Total

Corn 100 135 $2.50 $33,750Soybeans 50 40 6.70 13,400Total Income 47,150

Expenses

Fertilizer 6,500Seed 3,350Pesticides 4,500Trucking 500Drying 1,300Labor and management 4,500Machinery Ownership costs 5,500 Operating costs 3,000Property taxes and insurance 2,800Repairs and maintenance 500Depreciation of buildings, fences 800Total expenses $33,250

Annual net income $13,900

Capitalization of income:

Capitalization rate Total value per acre 8% ($13,900/0.08) = $173,750 $1,086 6% ($13,900/0.06) = $231,667 $1,448 4% ($13,900/0.04) = $347,500 $2,172

hypothetical 160 acre tract with 150 tillable acres


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Table 20-2Cash Flow Analysis of the Purchase of

a 160-Acre Tract at $1,600 per AcreYear 1 Year 2 Year 3 Year 4 Year 5

Cash receipts ($) 47,150 48,565 50,021 51,522 53,068Cash Expenditures

Seed, fertilizer, pesticides, 16,150 16,635 17,134 17,648 18,177

trucking, drying Machinery 5,750 5,923 6,100 6,283 6,472 Family living 4,000 4,120 4,244 4,371 4,502 Taxes, repairs 3,300 3,399 3,501 3,606 3,714Annual loan payments ($) Principal 8,320 8,320 8,320 8,320 8,320 Interest 13,312 12,646 11,981 11,315 10,650

Total cash outflow ($) 50,832 51,043 51,280 51,543 51,835

Net cash flow ($) -3,682 -2,478 -1,259 -21 1,233

Assumes a down payment of $89,600 with the balance financed by a 20-year loan ofof $166,400 at 8% interest with equal principal payments made annually.


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Leasing Land

A lease is a legal contract whereby thelandowner gives the tenant the use of theland for a certain time in return for a specified payment. Leases on agriculturalland are influenced by local custom. Type, terms, and length of leases tend to be uniform in an area.


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Cash RentRent is paid in cash. It may be due in advance or at the end of the production season.

Under a cash lease, the tenant receives all the income generated and usually pays all expenses except property taxes and other ownership costs of the property.


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Figure 20-3Average cropland cash rental rates

per acre, by region


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Table 20-3Setting a Fair Cash Rent (160 acres)

1. Landowner's Costs

Opportunity cost on investment $240,000 x 5% = $12,000Property taxes and insurance 2,800Maintenance 500Depreciation 800

Total 16,100

Total cost per acre $101

2. Tenant's Residual

Gross income $47,150

Expenses fertilizer 6,500 seed 3,350 Pesticides 4,500 trucking 500 drying 1,300 labor and management 4,500 machinery 8,500Total expenses 29,150Net income available to pay rent 18,000Net income available per acre $113

3. Crop share equivalent

Additional income: $47,150 x 50% = $23,575

Additional expenses: fertilizer 6,500 x 50% 3,250 seed 3,350 x 50% 1,675 Pesticides 4,500 x 50% 2,250 trucking 500 x 50% 250 drying 1,300 x 50% 650Total additional expenses $8,075Additional net income $15,500Additional net income per acre $97

4. Share of gross income

Gross income $47,150Share of total costs from land 35%Share of gross income to land $16,502Estimated rent per acre $103


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Crop Share Leases

Crop share leases are popular in areaswhere cash grain farms are common. These leases specify that the landlordwill receive a certain share of the crop.The tenant usually supplies all machineryand labor. Some variable expenses may be split.


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Other Types of Leases

• Labor share lease

• Variable cash lease

• Bushel lease

• Custom farming


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Table 20-4Comparison of Lease Types

Fixed Variable Fixed Customcash cash bushel farming

Price risk borne by: Tenant Both Both Both OwnerProduction risk borne by: Tenant Both Tenant Both OwnerOperating capital supplied by: Tenant Tenant Tenant Both OwnerManagement decisions made by: Tenant Tenant Tenant Both BothMarketing done by: Tenant Tenant Both Both OwnerTerms adjust: Slowly Quickly Medium Quickly Slowly

Crop orlivestock share


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Table 20-5Example of Inefficient Fertilizer Use

Under a Crop Share Lease

Total marginal Tenant'sMarginal value product, marginal

Fertilizer Yield input cost at corn at value (lb) (bu) $0.20/lb ($) $2.20 per bu ($) product ($)

60 95 4.00 80 100 4.00 11.00 5.50100 104 4.00 8.80 4.40120 107 4.00 6.60 3.30140 109 4.00 4.40 2.20160 110 4.00 2.20 1.10


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Table 20-6Determining Income Shares Under a Crop Share Lease

Cash Item Whole Farm Owner Tenant Fertilizer $6,500 $3,250 $3,250Seed 3,350 1,675 1,675Pesticides 4,500 2,250 2,250Trucking 500 0 500Drying fuel 1,300 650 650Labor, management 4,500 0 4,500Machinery ownership 5,500 0 5,500Machinery operating 3,000 0 3,000Property taxes, insurance 2,800 2,800 0Repairs and maintenance 500 500 0Depreciation of buildings, fences 800 800 0Opportunity cost for land 12,000 12,000 0

Total costs $45,250 $23,925 $21,325

Percent contributed 53% 47%


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Conservation and Environmental Concerns

Conservation can be defined as the useof farming practices that will maximize the net present value of the long-run social and economic benefits from landuse. Ordinary budgeting techniquesare often inadequate for deciding howbest to achieve the goals of conservation.


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Long-Run versus Short-Run Consequences

Most conservation practices require someextra expenditures. They may also reducecrop yields in the short run. The short-runreduction in profit may be necessary toachieve higher profits in the future or toprevent a long-run decline in productivity.


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Farming Systems Analysis

Most farms and ranches carry out morethan one type of crop or livestock enterprise. Farming systems analysisinvolves understanding how differententerprises affect each other.


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Off-Farm Effects

Many of the decisions made by farmersand ranchers have consequences thatgo far beyond the boundaries of the farm.Agriculture must consider more than justfarm input costs when making decisionsabout input use. The total societal costsof using various technologies is becomingan important factor in choosing practices.


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Regulations and IncentivesBoth the federal and state governmentshave enacted laws to promote and sometimes require land use and productionpractices that preserve and enhance soil,water, and air resources. Future conservation efforts may increasingly become a matter of selecting the least-costcombination of practices to meet therelevant target.


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Summary

Land is an essential resource for agricultural production. The decision to buy or lease land will affect the production capacity and financial condition of the business for many years. In making land-use decisions, farmers and ranchers also need to consider the long-run environmental consequences.

Farm Management Chapter 20 Land Control and Use.

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