university of maryland extension jenny rhodes shannon dill john hall extension educators,...

University of Maryland Extension

Jenny RhodesShannon Dill

John HallExtension Educators,

Agriculture & Natural Resources

Surviving the Risk: A look at lease

agreements, budgets, marketing and more!

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•Crop Budgeting•Communication

•Leasing•Marketing


Crop budgeting

What are enterprise budgets?

• Enterprise budgets – – An organized listing of your estimated gross

income and costs which can be used to determine the expected net income for a particular enterprise

– Budget on a per unit basis – 1 acre or Per Bushel

– Sections include• Income, Costs, Profit

5 Parts of a Budget

• Investment

• Gross Income

• Variable Costs

• Fixed Costs

• Net Income

Budget Suggestions• Should be prepared with specific objectives

– Markets, establishment, soil types, management

• Receipts and costs are often difficult to estimate– Numerous, variable – Be sure to have a column of your estimates

• Should contain receipts for every product and by product – processing, stalks etc

• Prices used should reflect market values and productivity of enterprise resources– Ie land, labor, equipment

Variable costs: Cost items that vary with production volume.

VARIABLE COSTS

SEED RR 1000 SEEDS 27 $2.63 $71.01

SOIL TEST ACRE 1 0.30 0.30

NITROGEN POUND 140 0.43 60.20

PHOSPHATE POUND 30 0.54 16.20

POTASH POUND 60 0.66 39.60

LIME TON 0.5 45.00 22.50

LUMAX QUART 2.5 13.10 32.75

ATRAZINE QUART 0.5 1.65 0.83

ROUNDUP QUART 1 15.50 15.50

CROP INSURANCE (CRC 70%) ACRE 1 25.00 25.00

DRYING FUEL BUSHEL 150 0.36 54.00

INTEREST ON OPERATING CAPITAL $337.89 0.5 8.5% 14.36

TOTAL VARIABLE COSTS LISTED ABOVE $352.25

Cost Components

• Fixed Costs– Fixed costs are expenses that do not vary

with the level of output. • Building costs• Machinery costs• Taxes• Insurance• Mortgage

DIRTI

• Deprecation

• Interest

• Repairs/Maintenance

• Taxes

• Interest

Custom Rates

• Conducted survey in Fall 2008

• 47 responses

• Used when creating enterprise budgets because fixed costs vary so much!

• Rates include labor and fuel associated with the practice

Net IncomeTOTAL VARIABLE AND FIXED COST LISTED ABOVE $542.78

NET INCOME OVER VARIABLE & FIXED COSTS LISTED ABOVE $66.22

PRICES

NET INCOME ABOVE VARIABLE AND YIELDS $3.05 $4.06 $5.08

FIXED COSTS LISTED ABOVE FOR 112.5 ($200.22) ($86.03) $28.16

VARIOUS YIELDS AND PRICES 150 ($86.03) $66.22 $218.47

187.5 $28.16 $218.47 $408.78

Break Even AnalysisBreak Even Analysis

Unit Costs ($) ==Fixed Costs ($) Variable Costs ($)+

Units Produced (lbs, dozens, bag)

Slide Adapted from: Dr. Wen-fei Uva Department of Applied Economics and ManagementCornell University


Landlord-TenantRelationships


Communication Problems


1. Unclear message

2. Stereotyping

3. Incorrect Channels

4. Language

5. Lack of feedback

6. Poor listening skills

7. Interruptions and physical distractions


Guidelines for Tenants


“Keeping the Landlord Happy”

no different from an

“Effective Public-Relations Strategy in any Business”


Public-Relations Strategy


1. Communicating with landlord

2. Educating landlord about agriculture

3. Explaining farm costs and their change

4. Providing regular crop reports during the growing season

5. Maintaining appearance of property

6. Treating landlord like family


Guideline for Tenants


1. Have a written lease

2. Resume`

3. Objectives

4. Cropping Plan

5. Regular Updates

6. Inform and Educate

7. Cost Information


Guideline for Tenants


8. Alert landlord of problems

9. Document in writing

10. Improve appearance

11.Acknowledge life events

12.Encourage landlord visits to your farm

13.PAY EXPLICIT ATTENTONTO THE NEXT GENERATION OF OWNERS!


Guideline for Landlords


1. Have a written lease

2. Ask questions

3. Provide information about objectives

4. Stay informed

5. Schedule yearly meetings

6. Be rational


Resume`


1. Biographical background

2. Statement of management objectives for the future

3. Experience

4. Environmental statement

5. Risk management strategies

6. Information – insurance coverage & limits

7. References



Frank Farmer100 Better Farmer Lane

Centreville, Maryland 21617(410) 758-9999

Fax: (410) 758-9988E-mail: [email protected]

Education:B.S., Agriculture Studies, University of Maryland, 1983Queen Anne’s County High School, 1979.Occupation:Farm owner and operator Communication:I publish a quarterly newsletter notifying those who I rent or crop share with of cropprogress, market news, and new technologies I am incorporating into my operation.

Resume`

mailto:[email protected]



Management Objectives:My agriculture management objective is to achieve the highest level of revenue on a parcel of land while

simultaneously minimizing soil erosion, chemical runoff, and loss of production. I am involved in continued education of developing new technologies, and I am actively involved in adopting those new technologies

that improve the economic viability of agriculture production.Experience, Advanced Training, and OrganizationsFarming BackgroundInvolved in farming 1,000 acres of crop land in QueenAnne’s, Talbot and Kent counties.• Own 400 acres• Rent 600 acresTypical yields:• Corn:135/bushel/acre (historical county yield - 100 bushel/acre)• Soybean: 45/bushel/acre (historical county yield - 43 bushel/acre)Advanced Training and Licenses Held• Attend approximately five workshops annually sponsored by the University of Maryland Extension and farm

organizations• Private Pesticide Applicator License • Nutrient Applicator VoucherOrganizations• Queen Anne’s County Extension Grain Marketing ClubLEAD Maryland Foundation – Class IV• Queen Anne’s County Farm BureauEnvironmental StatementMy management practices include no-till planting to reduce soil erosion and leaching. I believe in the adoption of new

technologies that prove both economically and environmentally beneficial to agriculture production.Risk Management StrategiesI actively participate in a University of Maryland extension grain marketing club which allows me to hone my marketing

skills. I subscribe to DTN AgDayta which allows for up-to-date price quotes and marketing recommendations.Insurance CoverageNationwide Insurance. Contact Irene Insurer at 220 W. Water Street, Centreville,MD 21617, (Phone Number) for

further information.



ReferencesAvailable Upon Request (see below)(Have these with you in case the landowner requests these

while talking to him/her)- Separate Page-ReferencesLarry Landowner1111 My Farm LaneEaston, MD 21601Phone Number 410-822-0000Albert Ag LenderMidAtlantic Farm CreditMain StreetChestertown,MD 21610Phone Number 410778-9999


Summary


• It is all about Communication

• Be Professional

• Relationships are important

• Find the best means of communication for you and your business


Leases:

WrittenShare the Risk


Farm Lease Agreement

Written agreementComponents


Lease Components:

1.Names of Parties and description of property

2.Term of Lease3.Rental Rates and arrangements

a. Crop-share *b. Cash Lease *c. Flexible cash lease *d. livestock share leasee. Farm Machinery, equipment

and building leases


Lease Components Cont.:

4. Farm operating expenses5. Conservation and Improved Practices6. Improvements and repairs7. Records8. No Partnerships statement9. Right of Entry10. Arbitration ( settlement)11. Additional agreements and

modifications12. Signatures


You need to have a written agreement

The purpose of this presentation is to provide tenants and landowners basic information needed to write rental agreements. Changes in the structure of production agriculture have increased the need for persons entering a contractual rental arrangement to have a written agreement. Additionally, rental agreements should be updated regularly to incorporate changes in government programs, environmental regulations, costs of production and revenue received


Value of a written lease

The value of a written contract is in helping theprospective landowner and tenant think about andagree upon the essential considerations of leasing andoperating the farm.To arrive at an equitable lease, the interested partiesshould talk over the basic considerations involved in theleasing arrangement and in managing the farm. Theyshould then make a contract, preferably written, basedon these considerations.


1 – Names of parties and description of property

Every lease should identify the parties entering intothe lease contract and give the legal description of theproperty or properties involved. In addition to the legaldescription, information such as the distance and

direction from town, road name, mailing address and popular name of the farm might be given.


2 – Term of leaseThe term, or length of time the lease is to be in effect,

should always be agreed on and should be stated in the contract.

The term of the lease is important. A long-term leaseis often necessary to develop a profitable business overtime because of the need for permanent capital

investments.The tenant will not want to share investment inpermanent facilities on a short-term lease. Usually,landowners favor a short-term lease on the basis that alonger-term lease lowers the market value of the farmbecause it cannot readily be sold. This problem can besolved by including a termination clause that wouldapply in case the farm was sold.


The lease agreement can be for either a one-yearlease or a longer lease, as desired. Most agreementsinclude an automatic renewal clause and allow someflexibility in the terms of the lease if the parties undercontract give adequate notice.

Renewal:a multi year lease is automatically renewed unless a termination notice has been submitted.

Lease dates: Typically a lease runs for a calendar year. However, this may vary


• Termination of lease

1. It is recommended that a termination notice be given by July 1 of the growing season.

2. If termination is given, the operator has the right to harvest all crops currently growing on the given land.

3. If there are crop input costs for crops currently growing, these input costs should be addressed at the time of termination.


In some communities, it is customary to give noticethat the lease is to be terminated before wheat sowingtime in the fall or by March 1 in the spring. But failureof either party to give this notice does not necessarilyindicate a desire that the lease be continued.Consequently, it is desirable to state in the contract theprocedures to be followed for terminating or continuingthe lease contract.


3 – Rental rates and arrangements

Rental rates and arrangements for payment or disposition of the rent are a significant part of any lease, whether written or oral.

Basically, there are five methods of paying rent:a. crop-share rent – “share crop”b. livestock-share rentc. cash rentd. Flexible cash rente. farm machinery, equipment and buildings rent –

“custom farming”


a. Crop-share rent – Characteristics of a crop-sharelease are that each party receives a share of the crop asearnings for their contribution in land, labor and capital.• Payment could be in BushelsNormally, crop-sharing involves grain crops such assmall grains, corn, and soybeans and land used toparticipate in government programs. Remaining areasused in producing forages (hay and pasture) are normallycash rented.The landowner’s share of the crop depends on thecontribution made toward production of the crop. Whencrops are divided 50-50, the landowner normally pays50 percent of the cost of fertilizer, seed and chemicals inaddition to providing the land. In other instances, thelandowner may or may not share in cash productioncosts and receives a 1⁄4 to 1⁄3 share of the crop as a returnto land.


.b. Livestock-share lease – Livestock-share leases varyconsiderably because of differences in contributionsmade to the business by each party. The owner normallyfurnishes land and buildings, while the tenant furnishesmajor portions of the crop machinery. Livestock isowned jointly. Production costs such as feed, veterinaryand medicine, other livestock expenses, fertilizer, seedand chemicals are shared equally.Livestock machinery and equipment may be jointlyowned. Labor costs are shared according to the agreement,as are repairs and upkeep on permanent buildings.The landowner usually pays for construction ofpermanent buildings, or arrangements are made toreimburse the tenant in case the lease is terminated.Livestock and crop sales are divided according to theterms of the agreement


c. Cash lease – The cash lease is normally uniform andrelatively simple. The tenant pays the landowner a cashsum per acre or a lump sum for his or her investmentin farm resources. Provisions in the lease generally statethe terms of agreement. For example, the landownermay place restrictions on the use of land or fields for certaincrops. Also, the agreement might state the degreeof productivity to be maintained. Provisions should alsostate the amount and method of paying rent.

degree of productivity: The definition may need to be defined as part of the agreement. It is assumed that this definition reflects the soil nutrient values. Nutrient level, soil tilth, erosion and other soil parameters may also be addressed


d. Flexible cash lease – The flexible cash lease is ahybrid of the cash lease. The flexible cash lease agreementstates that the tenant will pay in proportion toeither or both the price and the yield level. There are many methods for flexing the rental agreement. Themost common method is flexing gross (or net) revenueso that the tenant and landowner share the risks associatedwith cash renting. If revenue is greater than theestablished base level, the tenant and landowner sharethe excess revenue. If revenue is less than the establishedlevel, the tenant and landowner share the lost revenue.However, often there is a cash lease price floor that thelandowner is guaranteed. Other types of flexible cashrental arrangements include flexing only price or yieldor flexing both


e. Farm machinery, equipment and buildings leases –Renters have found that leasing unused resources canbe cheaper than making new capital investments. Also,producers have found in certain situations leasingmachinery and equipment from dealers can be cheaperthan purchasing. Additionally, machinery and equipmentleasing arrangements can be between renters andowners to allow the renter to avoid paying full valueand the owner to generate revenue to cover the ownershipcosts. Renters need to compare the size, condition,obsolescence, use, location and lease cost of the capitalgood versus the cost of purchasing the capital good outright.Owners are primarily interested in recoveringownership costs. The lease price should equal theamount needed to cover ownership costs and variablecosts, such as upkeep costs incurred from renting thecapital good. Both renters and owners should considercurrent value, depreciation, interest, insurance andtaxes, inflation, repairs and maintenance when agreeingon a lease value.


The cash lease is the most common. The secondmost often used is the crop-share lease. Flexible rentalagreements are increasing in use as tenants seekto share downside revenue risk with landowners andlandowners seek to capture upside revenue potential.The rental arrangement for each specific farm should bedeveloped to fit the farm and the planned operating

procedures.These conditions are known best by the landowner and

prospective tenant, so they should work out the most satisfactory arrangement between them. No standard lease form can be used to develop an equitable rental agreement. The function of the form is to record operating procedures agreed upon by the parties entering the contract.


4 – Farm operating expenses

Reaching agreement on farm operating expensesprovides an opportunity for the tenant and landownerto discuss and designate the share of cash productioncosts that are to be paid by each party.

We have shared Custom rates and budgets with you

Soil Ph / Lime may fall into this area and needs to be addressed


5 – Conservation and improved practices

To improve or maintain the productivity of thefarm, conservation and improved production practicesare usually warranted. Normally, conservation andother improved farming practices require additionallabor and expenditures. Give important considerationto questions such as who contributes the labor and costof implementing the practice and how these

contributions affect income for both tenant and landowner.

• CRP – cutting waterways – spraying noxious weeds


6 – Hunting

Waterfowl and deer hunting provide a significant value to many farms on Delmarva.

Careful consideration must be given to liability issues as well as methods of hunting, frequency of hunting, trash from hunters, pit, stand and roadway maintenance and location.

The tenant must understand liability issues of the

property owner

See additional issues and contract


7 – Improvements and repairs

Misunderstanding is prevented by agreeing aheadof time what repairs will be done, how much will bedone and what each party will furnish toward them.In many instances, tenants provide equipment thatlegally becomes permanent fixtures on the farm.Disagreements can be avoided and the farm’s

resources more fully used if both landowner and tenant agree on needed improvements.

Roadways, fencing, and machinery storage fit this need.

Goose pit construction may also fit this area


8 – RecordsFarm records are a necessary part of farming. Therecords need not be elaborate or formal accounts but atleast should cover all the expenses affecting both parties.The tenant is the logical person to keep the recordsbecause he or she is usually in closer touch with the day to-day operations. If the records are kept as part of acomplete farm account record, they will have greatervalue to the total business.

Nutrient management plans maybe part of the records shared. They include:1. soil tests2. nutrient inputs3. Yield records

*Owners can get copies if requestedPesticide records may also be part of the records shared


9 – No partnership

A lease does not create a partnership. A statementof this nature is advisable in any lease form.Rental arrangements involving livestock-shareleases are more apt to be considered partnerships thanthe crop-share arrangements, but such arrangements

are more likely to be considered modifications of thelandowner-tenant relationship as traditionally

established under the crop-share lease.


10 – Right of entry

Every farm lease agreement should include a statementgiving the landowner the legal right to enter theproperty. Without such a statement, a tenant has the

right to treat any entrant on the property as a trespasser, including the landowner


11 – Arbitration (settlement)

Differences of opinion can arise rather unexpectedly.For this reason, leases should be in writing. Timetends to make oral agreements hazy while a writtenagreement is always available for reference and recall.Also, a written lease forces both parties to “argue out”their differences in most areas where differences ofopinion may occur. This section is included to

encourage the use of disinterested persons for settling differences promptly and in a friendly manner rather than by litigation.

The county agent, MDA personnel, banker, etc may assist in arbitration


12 – Additional agreements and modifications

It is often necessary to change or add to contractualarrangements, and one of the tests of a good lease is

its flexibility for changing the operating plan. Any changes made after the initiation of the original contract should be made a part of the written contract.

• All agreements which encumber the land should be addressed.

• CSP/ CRP are examples


12 – Signatures

Signatures by each party are one of the five essentialparts of the lease contract. The agreement becomes acontract when it is signed. All co-owners of the property,including husband and wife, should sign the leaseagreement when property is held in joint tenancy or

tenancy by entireties.

Signatures should be by individuals rather than family members, partners, share holders, etc. so it is clear who is involved.


Our goal is to suggest lease agreements that will:

Reduce Risk


Risk considerations

1.Crop Input costs2.Machinery costs3.Fuel costs4.Land costs5.Volatile commodity markets 6.A very troubled monetary system


Famer controlled costs

1.Crop Input costs2.Machinery costs3.Fuel costs


What can you do to control Crop Input costs?

a.Seedb.Fertilizerc.Herbicidesd.Insecticidese.Tillage methods


What can you do to control Machinery costs?


DIRTI – Method to determine cost of ownership

D- Depreciation I – InterestR – RepairsT – Taxes I - Insurance


DepreciationDefinition

a. tax purposes

b. real value purposes(amortize)


Depreciation - Realb. real value purposes

$200,000 combine 8 years

Residual value $50,000What are annual costs? 150,000/8

$18,750.00 per year


DIRTI $200,000 combineOwnership costs

1.Amortization $18,750.00

2. Interest 50% at 9% $9,000.00 3.Repairs 1% $2,000.004.Taxes5. Insurance 1% $2,000.00

Annual ownership costs $31,750.00


Machinery costs

What are real combine costs at $31,750.00 per year per acre?

a. 500 acres $63.50b. 1000 acres $31.75c. 1500 acres $21.17d. 2000 acres $15.87


Fuel costs

1. Assume 12 gallons per hour2. $4.00 per gallon3. 3 acres per hour

12 * $4.00 = $48.00 / 3 = $16.00 per acre


What about Labor?

Assume $15.00 per hour (salary plus any benefits)

Remember Health care - $5,000 +

$5.00 per acre


Total Costs for combining500 acres 1000 acres

1. Ownership $63.50 $31.752. Fuel 16.00 16.003. Labor 5.00 5.00

Real costs $84.50 $52.75

Per acre


Total Costs for combining1500 acres 2000

acres1. DIRTI $21.17 $15.872. Fuel 16.00 16.003. Labor 5.00 5.00

Real costs $42.17 $36.87

Per acre


Years $25,000 $50,000 $75,000 $100,000

5 $5,000 $10,000 $15,000 $20,000

7 $3,571 $7,143 $10,714 $14,286

9 $2,778 $5,556 $8,333 $11,111

12 $2,083 $4,167 $6,250 $8,333

15 $1,667 $3,333 $5,000 $6,667

Ownership costs


Suggestion: Custom rates should be

a. ownership costs

Plus b. Fuel

c. labor


Land Costs


Rental rates and arrangements

• Cash Rental Rates Determine a fair rate • Crop-Share Leases • Calculating a Cash Rent Lease • Flexible Cash Leases


Cash rental rates

How can you determine one rental rate when gross sales varies from

$225.00 to $810.00?


Background• Land values have been steadily increasing along with land taxes. Land owners are looking for ways to off set this increased costs •Land rents have escalated dramatically in some areas•Rents in Iowa have topped $300 per acre when corn was $6.00•Some Maryland rents have approached $175.


Land Rental rates and arrangements-

1. Crop-Share Leases2. Cash Rental Rates3. Flexible Cash Leases


Maryland Cash Rent by CountyNASS – UDSA Annapolis

County 2005 2006 2007

Caroline $81.26 $75.68 $73.65Cecil $72.31 $74.44 $72.19Dorchester $81.56 $76.92 $77.54Kent $83.08 $83.12 $89.13Queen Anne $90.47 $91.81 $92.18Somerset $62.57 $63.55 $64.68Talbot $76.71 $83.12 $83.02Wicomico $71.45 $73.20 $73.21Worchester $75.04 $80.64 $82.38

Does not include 2008


Calculating Cash RentMaryland data

2 a. Average Rents Per Unit – Corn Yield

Determine Average Rent for Corn

Farm’s Average Corn Yield (bu/A) 125Equals the Average Rent for Corn Acre $100

Rent per bushel of Corn yield $ 0.80


Rental rates based on soil productivity

James Brewer Resource Soil Scientist

USDA-NRCSEaston, MD


Rental rates based on soil productivity groupings, yield potential and value

Group 1150 bushels per acre* $0.80= $120+

Group II 135 bushels per acre* $0.80= $108+

Group III 120 bushels per acre* $0.80= $96+

Group IV 90 bushels per acre * $0.80= $72+

Average 125 bushels per acre


Additional IowaCash Lease Calculations

A. Gross Income MethodB. Tenant Residual MethodC. Crop Share MethodD. Return on Investment Method


Iowa CORN: (175 buX $3.80) + $22 = $687.00 SOYBEANS: (45 buX $7.70) + $22 = $368.50

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 4a. CORN:$687/ac X 35% = $240.45 4b. SOYBEANS:$368.50/ac x 40% = $147.40

Average $193.93

A. Share of Gross Income


CORN: $475.00 – $482.63 = -$7.63

SOYBEAN: $308.00- $357.10 =$(-49.10)

Average: $-28.37Price and yield is everything

B. Tenant Residual MethodCurrent - Md


12/3/2008 PricesCorn: 50% of gross minus owner’s costs $475/2= $237.50 –($377.89/2($188.95)) = $48.55

Soybeans:50% of gross minus owner’s costs$308/2= 154-(208/2( $104.00) = $50

Average:$49.28

(1)The owner is assumed to pay 50 percent of the costs for seed, fertilizer, lime, pesticides, crop insurance, interest and miscellaneous, and drying and storage.

C. Crop Share Method 50-50 Share


Future Consideration

•


•


Gross sales variation

•High yield - low price 180 bu. $2.50Gross sales = $450.00•Low yield - low price 90 bu. $2.50Gross Sales = $225.00•High yield – high price 180 bu. $4.50Gross sales = $810.00•Low yield – high price 90 bu. $4.50 Gross sales = $405.00


Cash rental rates

How can you determine one rental rate when gross sales varies from

$225.00 to $810.00?


Flexible Cash Leases

Desire:Stable and predictable rents.

Current Reality:Prices and yields are very unpredictable.

Potential Solution: Flexible lease contract


Flexible Cash Lease is a Cash Lease

• If the final rent does not depend on the farm yield, a flexible rent is still considered to be a cash rent.• Example: base rent on county average yield and actual price at harvest.• County yields are not published until March each year.


Types of Flexible Cash Leases

• Rent varies with both price and yield – Matches tenant’s ability to pay• Rent varies with yield only – Could have high yields, low prices• Rent varies with price, only – Could have low yields, high prices

Grain Marketing

Winning the Game


Other Resources• Materials from this meeting – http://www.extension.iastate.edu/feci/Leasing/vflm.html• Online Courses –Ag Management e-School – http://www.extension.iastate.edu/ames• Workshops, meetings, conferences – http://dbs.extension.iastate.edu/calendar/• Publications –rental survey, land value survey, etc. – http://www.extension.iastate.edu/pubs/• Articles and spreadsheets – http://www.extension.iastate.edu/agdm/• Private Consultation – http://www.extension.iastate.edu/ag/fsfm/fsfarmmg.html


•

THANK YOU!

www.mdgrainmarketing.umd.edu

university of maryland extension jenny rhodes shannon dill john hall extension educators,...

Documents

costs net income slide

variable fixed costs

practice slide

bag slide

profit slide

total variable costs

crop budgeting slide

cost components fixed