Farmland Purchase Analysis

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• 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

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

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

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

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

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

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

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

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

• 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

• 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?

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.

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