farmland purchase analysis
DESCRIPTION
Farmland Purchase Analysis. Resources. ISU Ag. Decision Maker; Farmland Purchase analysis Farmland values Costs of production Price assumptions General update information USDA FSA ERS Other Iowa ag . Development Authority Other. Financial Data. Total acres Price per acre - PowerPoint PPT PresentationTRANSCRIPT
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Farmland Purchase Analysis
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Resources• ISU Ag. Decision Maker; – Farmland Purchase analysis– Farmland values – Costs of production– Price assumptions– General update information
• USDA– FSA– ERS– Other
• Iowa ag. Development Authority• Other
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Financial Data• Total acres• Price per acre• Percent down payment– This will vary depending on institution, credit
condition, co-signer, security, etc.
• Amount of the loan (balloon)• Interest rate– Current Fed. District average was 6.13 down from
6.41 a year ago
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Financial Data• Interest (cont)– Financial position– Terms– Remember beginning farmer loans; FSA, IADA, other;
combining them• Years and number of payments per year• Current or desired rate of return on equity
capital; how much do you want to earn; opportunity cost of your money
• Interest on operating money– 6.74 last quarter; 6.23 last year
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Costs and returns data• USDA payments; not as big as they used to be
but still important; CRP and other long term type payments
• Annual income from other sources; animals, leases, building rents, etc. BE sure to include costs associated with the income
• Real estate taxes; quite a variation; Iowa tax based on productivity but it’s a really confusing formula; can’t go by CSR same county $24.40 for 85 CSR and $23.09 for 86 CSR. $25.92 for 81 CSR in another county. Average around $18 per acre
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Costs and returns data• Other annual ownership costs; fencing, tile, so
forth• Closing costs• Expected increase in value over time (%)• Percent rate of cash return on farmland;
capitalization rate• Initial investment needed for improvements• Initial investment needed for extra machinery
if needed
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Costs and returns data• Will land be rented, if so, how and how much• Custom farmed; what is your share• If you are farming it yourself-• Anticipated crop rotation• Number of acres of each crop; remember if
you are having 100% corn, then 100% beans, etc. to account for all the acres over time. This is trickier the more crops you have and the longer the rotation
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Costs and returns data• Expected yield and variance; impact of
alternative yield assumptions must be included• Expected price and variance; same as with yield
as far as evaluating a range of prices• Other income; corn stover, grazing, etc.
(remember costs)• Nonland costs of crop production; seed,
chemicals, fertilizer, machinery, etc. All the costs to put in the crop, except the land cost; be sure to include interest on borrowed operating funds
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Analysis• Step 1;– Estimate the gross revenue from the crop sales– Calculate gross income from all sources
• Step 2;– Calculate the crop production costs– Determine all the costs
• Step 3; – Estimate the cash net return to land
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Analysis
• Estimated value based on typical return;– Step 3/capitalization rate
• Estimated value based on real cost of capital;– Step 3/(weight average cost of capital+annual
increase in value)
• Return + capital gains. Where do capital gains come into play and how
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Example• 80 acres at $5000 an acre; $400,000• You have 35% down payment; $140,000• Finance the rest at 7% for 30 years with 1
payment per year; $20,952 per year• Equity capital rate; 4%• Assume govt and other income = 0• RE taxes; $20 or $1600/year• Other ownership; $500• Closing costs; $1300
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• Average capitalization rate; 3.73%• Assumed increase in land values; 4% (7%
average since 1970)• No new equipment needed, being charged
average cost for use of equipment• Corn/Soybean rotation (40 acres of each) with
170/50 bushel yield and $3.75 and $9.50 price• Corn $418 non-land COP; $29 labor, $55 fixed
machinery• Soybeans $239 non-land COP; $27 and $36
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• Crop sales; $46,000• Crop expenses; $26,078• Other 2,100• Total non-land $27,178• Cash revenue $17,822• At 3.73% $477,802 or $5973• Wted cost of capital; (.35*.04)+(.65*.07) - .04 =
1.95% or $11,424 per acre• Expected cash return; $17,872/$400K = 4.4%• + 4% increase or not?
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Cash flow• $20,952 or $262/acre loan payment• Leaves -$990 or -12.81 per acre• Most you could borrow; $3092/acre• With 35% down; $4764; with same amount
down $4846.• Be sure to change your assumptions and see
what happens.
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Purchase Analysis• Be realistic in your evaluation• Remember that land ownership takes time;
land tenure ladder• Carefully evaluate alternative possibilities • Get as much information as you can• Make your decisions based on your
circumstances, not someone else's