2013 Risk and Profit Conference Breakout Session Presenters

2. Kansas Rental Values -- What Cash Rent Information is

Right? Kevin Dhuyvetter Kevin Dhuyvetter assists farmers, landowners, and others throughout Kansas with risk and return assessment of alternative crop and livestock production and marketing systems. He works extensively with land-related issues such as buying and leasing land. Current research projects are looking at factors impacting land values, crop land cash leases, management factors impacting farm profitability, economics of crop-related production technologies, factors affecting feeder cattle and crop basis, and machinery costs. One of Kevins trademarks is his development of decision tools that can be used by clientele to help them with the many decisions they face. Mykel Taylor Mykel Taylor joined the Department of Agricultural Economics as an Assistant Professor in 2011. Her research and extension programs are focused in the areas of crop marketing and farm management. She grew up on a cattle ranch in Montana and attended Montana State University majoring in Agribusiness Management. Her PhD in Economics is from North Carolina State University. Mykel has worked in extension positions at both Kansas State University and Washington State University. Some of her current research areas include measuring basis risk for commodity grains, understanding the implications of food safety and country of origin labeling on meat demand, and estimating land values for crop and pasture land in Kansas.

Abstract/Summary Beginning in 2009 Kansas Agricultural Statistics (KAS) has surveyed producers and landowners regarding cash rent for crop land and pasture at the county level. This provides much more information than has been available historically (values were only available at the Crop Reporting District level). However, in recent years with land values increasing significantly, the appropriateness of these survey values as a reflection of the current cash rent market has been questioned. In response to this, an alternative method of estimating cash rents for cropland at the county level has been developed. This session will outline the alternative method developed and report on values from the two approaches and discuss reasons as to why they might vary. While a similar type of approach is not currently available for pasture rents, an alternative approach for estimating pasture rents at the county level will also be presented and discussed.

KansasStateUNIVERSITY

KansasRentalValuesWhatCashInformationisRight?

DepartmentofAgriculturalEconomics

KevinDhuyvetter MykelTaylor7855323527 7855323033kcd@ksu.edu mtaylor@ksu.edu

DepartmentofAgriculturalEconomicsKansasStateUniversity

www.agmanager.info

Whichbestdescribesthefrequencyofyouruseofcomputerspreadsheets(e.g.,Excel)

1 2 3 4

0% 0%0%0%

Testtomakesureclickersareworking

1. Regularuser(e.g.,daily/weekly)

2. Moderateuser(e.g.,monthly)

3. Limited(e.g.,12times/year)

4. Whattheheckisaspreadsheet?

Typesofleasesoncropland

Cropshare(shareincomeandsomeexpenses) Netshare(shareincomebutnotexpenses) Fixedcashrent

Fixedcashrentwithbonus Combination cashrent+share Cashrent flexonprice(bushelrent) Cashrent flexonyield(pricerent) Cashrent flexonrevenue(i.e.,yieldxprice)

Traditional

Hybrid

TheleasearrangementforthemajorityofcroplandacresIrentormanageis

1 2 3 4 5

0% 0% 0%0%0%

Whattypeofleasesdoyouuse?

1. Cropshare(shareinputs)

2. Netsharerent(noinputsshared)

3. Fixedcashrent

4. Flexiblecashrent

5. Doesnotapply

8

19

30

11.5

10

21.5

0 5 10 15 20 25 30 35

Customfarming

Variablecashrent

Traditionalcashrent

Cropsharewithothermodifications

Cropsharew/supplementrent

Traditionalcropshare

Percent

LeaseArrangementsUsedbyFarmManagers,201112

n/a

43.5

56.5

8.6

55.7

35.7

0.8

21.8

77.3

0 20 40 60 80 100

Other

Cropshare

Cashrent

Percent

FarmlandLeaseArrangements

Iowa(2007)Kansas(2010)Oklahoma(201011)

Sources:IL Schnitkey;IA Duffy,etal.;KS SchlegelandTsoodle

Distributionofcropleasesbytypeoflease

CornBeltgenerallyhasahigherpercentageofcashrent Why?

Trendistowardsmorecashrentmosteverywhere Why?

Theuseofnontraditionalleasesisincreasing Why?(speedofadoptionvariesconsiderablyregionally)

0

10

20

30

40

50

60

70

80

90

100

1998 2000 2002 2004 2006 2008 2010 2012

Perc

ent

Trend in use of cash leases by regions in KS

West Central East

CropshareisverycommonleasetypeinKansas,butthetrendisformorecashrent

AgriculturalResourceManagementSurvey(ARMS) 61.3%ofrentedacresin2010wereonacashbasis.

Source:KSUandKSAgStat NonIrrigatedFarmLeaseArrangementSurveys

Oncashleases,rentpaymentsaredue

1 2 3 4 5 6

0% 0% 0%0%0%0%

Timingofcashleasepayments

1. Jan1(approximately)

2. Atplanting

3. Atharvest

4. Dec31(approximately)

5. Multipletimes

6. Other

Lengthofcroplandleasesinyears

Producerstendtoleaselandfromthesamelandownerforarelativelylongtime,butcashleasestendtobeforfeweryears.

Whyisthis?

Sources:IA Duffy,etal.;KS SchlegelandTsoodle;OK DoyeandSahs

State Share Cash AllIowa (2007) 18.1 9.5 11.4Kansas(2010) n/a n/a 18.6Oklahoma (20102011) 17.0 14.0 15.3

Determiningthetermsofalease...

Tenant

Landowner

Howarecashleaseratesorthetermsofcropshareleasesestablished? Shortansweristhemarket Thatis,thetermsofaleasearedeterminedbyProducers(demand)negotiatingwithLandowners(supply)

S

D

P

Q

Marketestablishedrates...

LandUseValueProjectoftheKSUAgEconDeptannuallyconductsoneoffoursurveys(irrigated,nonirrigated,pasture,inputcosts)

KansasAgriculturalStatistics(KAS)annuallysurveyslandownersandproducersregardinglandvaluesandcashrents

Localandregionalsurveysofleasingpractices

Withsurveysthereisoftenatradeoffbetweenstatisticalvalidityandlevelofaggregation

Examplesofmarketestablishedcropshares

Source:SchlegelandTsoodle 2010KAS/KSUsurvey(availableatwww.agmanager.info)

PercentofLeasesbyCropSharePercentage

Landlord CropReportingDistrictShare NW10 WC20 SW30 NC40 C50 SC60 NE70 EC80 SE9020.0% 0.0% 0.0% 0.0% 1.4% 0.0% 0.0% 0.0% 0.0% 0.0%

25.0% 0.0% 3.5% 1.4% 0.0% 0.7% 0.0% 5.3% 1.0% 0.0%

33.3% 96.2% 96.5% 94.5% 62.7% 83.4% 90.8% 22.3% 70.7% 94.4%

40.0% 0.0% 0.0% 1.4% 28.9% 13.1% 6.4% 27.7% 9.1% 0.0%

50.0% 0.0% 0.0% 2.7% 6.3% 0.7% 2.1% 44.7% 17.2% 4.2%

66.7% 0.0% 0.0% 0.0% 0.0% 0.7% 0.0% 0.0% 1.0% 0.0%

75.0% 1.9% 0.0% 0.0% 0.0% 0.7% 0.0% 0.0% 0.0% 0.0%

Other 1.9% 0.0% 0.0% 0.7% 0.7% 0.7% 0.0% 1.0% 1.4%

Total 100% 100% 100% 100% 100% 100% 100% 100% 100%

Colorcodingscale >80% 5080% 2050% 520%

Forcashrentsyouareawareof,howdotheycomparewithKASvaluesonmap?

1 2 3 4 5 6 7

0% 0% 0% 0%0%0%0%

KAScashrentsurveyvaluesvs.yourobservations

1. Morethan25%lower

2. 1025%lower

3. Abouteven(+/ 10%)

4. 1025%higher

5. 2550%higher

6. 50100%higher

7. Morethan100%higher

PotentialissueswithKASsurveyedrentalrates

1. Doestheaveragevaluereflectyoursituation? Notalllandisequal Notallrelationshipsareequal

2. Missingcounties:2009=4,2010=6,2011=7,2012=243. Howwelldoaveragesreflectthecurrentmarket?

0

20

40

60

80

100

120

140

160

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Cash

rent,$/acre

AverageCashRentinKansasbyLandType

Irrigated(7.41%)Nonirrigated(3.92%)Pasture(3.18%)

Source:KansasAgriculturalStatisticsandKState

2%

8%

26%

35%

19%

7%

3%

0% 10% 20% 30% 40%

Lessthan$100

$100to$60

$60to$20

$20to$20

$20to$60

$60to$100

Greaterthan$100

Percent

Figure1.DistributionofFarmCashRentslessCountyAverageCashRents,2010.

Widevariabilityinrentsexists

Source:FEFO1121,Schnitkey,DepartmentofAgriculturalandConsumerEconomics,UniversityofIllinois.

Partlyduetolandqualitydifferences Bigportionduetorelationships

Landownersandtenantsaregenerallyawareofdifferencesthatexistandmuchofthesedifferencesareconsistentwiththeirdesires

Largedifferencesinobserved/reportedrents

Implications Averagecashrentsarenotagoodindicationofwhatit

takestoacquireland

Highcashrentswehearaboutarenotanindicatorofaveragerents

Source:FEFO1121,Schnitkey,DepartmentofAgriculturalandConsumerEconomics,UniversityofIllinois.

Tenant

Landowner

Howarecashleaseratesorthetermsofcropshareleasesestablished? Shortansweristhemarket

Whenmarketreportedratesarenotsufficienttoanswerthequestionathand,whatdowedo?

Whilelandownersandtenants(i.e.,themarket)ultimatelydeterminetermsofleases,weuseeconomictheory andtheequitable concepttoarriveatastartingpointfornegotiations andtobetterunderstandthemarket.

Determiningthetermsofacroplease...

Profitmaximization(MR=MC)

Economicprofits(expectedprofit=0*)

Opportunitycosts

Riskacrossleasetypes

Equalratesofreturnonannualinvestment(ifeconomicprofit=0,thenreturnonannualinvestment=0)

*Onaverage,inthelongrun

Principlesembodiedinanequitablelease

-100

-50

0

50

100

150

200

Ret

urn

over

TC

, $/a

cre

NC KFMA Enterprise Analysis

Corn ($46.45 / $-3.82)

Milo ($50.12 / $-8.28)

Soybean ($55.98 / $3.65)

Wheat ($6.49 / $7.10)

Alfalfa ($88.46 / $36.25)

Onaverage,weseldomcovertotalcosts.Why?

(Average for 2007-12 / 1991-06)

Source:KFMAEnterpriseAnalysisReport

3.002.502.001.501.000.500.00

0.50

1.00

1.50

2.00

2.50

3.00

$/bu

AverageManagementMarginforCornandSoybeansinIL

Corn(199106=0.29;200712=0.55)

Soybeans(199106=0.92;200712=1.20)

Onaverage,weseldomcovertotalcosts.Why?

Source:IllinoisFarmBusinessFarmManagementAssociation

Methodsofestablishingcashrentvalues

Marketgoingrate(ifavailableandbelievable)

Cropshareequivalent(adjustedforrisk)

Landownerscost

Amounttenantcanaffordtopay

Thelastthreerequireyield,price,andgovernmentpaymentprojections(aswellascostinformationusedforcropshare).

Itypicallyfocusonthesetwo

Landowner/producer riskreturntradeoffx

sx

Cashrent

Cropshare

Cashrent

Cropshare

Risk,$/ac

Return,$/ac

???

[Producer]

[Landowner]

Howshouldcashrentfornonirrigated landcomparewithexpectedreturnsfromequitablecropshare

1 2 3 4 5 6 7 8

0% 0% 0% 0%0%0%0%0%

Riskpremium

1. 510%higher

2. Roughlyequal

3. 510%less

4. 1015%less

5. 1520%less

6. 2030%less

7. 3040%less

8. >40%less

MethodofcalculatingKSUrentalrates

1. UsedKSULease.xlsandregionalcropbudgetstoestimateequitablenetshare percentagesforeachregion UsedaverageyieldscenariofromFMGuides Longrunpriceprojections(~5yearaverage) Customratemachinerycostsincreased20% Setlandvaluesuchthatreturns=totalnonlandcostsx10%

(i.e.,profit>$0 resultedinprofitsof~$14$30/acre)

2. Appliedequitablepercentagetoincomeateachcounty Yield=8yraverage(wheat,sorghum,corn,andsoybeans) Price=201317priceforecast Cropmixbasedonaveragevaluesin2002&2007census

3. Multipliedlandownerincomeby80%toaccountforrisk

35

KASsurveyvaluesofKansasNonirrigated CashRents,2012

36

KSUEstimatedKansasNonirrigated CashRents,2012*

*Estimatedinthefallof2012basedoncountyaverageyieldsandregionalpricesandusinganequitablenetsharelease(adjustedforrisk)approach.

37

RatioofKSUtoKASEstimatedCashRents,2012*

ValuesreflecttheamounttheKASvaluewouldneedtobemultipliedbytoequaltheKSUestimatedvalue.Forexample,avalueof1.5wouldimplytheKSUestimatewas50%higherthanKASvalue.

Averageratio=1.63(min=1.03andmax=3.17)

KASversusKSUestimatedrentalrates

Whythebigdiscrepancy?1. Dothevaluesrepresentthesamething?

2. Multiyearfixedrateleases?

3. Ratesthathavenotbeenrenegotiatedforyears?

4. Productivityofland/producermaynotbethesame?

5. WedontknowthetermsoftheleaseforKASvalues(e.g.,arebonusesincluded?)

6. Landowner/tenantrelationship?

7. Other?

LandvalueandcashrentinformationMAJOR changefromwhatwasreportedinthispaperpreviously

1.KASsurvey dataforlandvaluesandcashrents(sameasinthepast)

and2.KSUestimates ofcountylevellandvaluesandrents(newstuff)

KSUestimatesofbothlandvalues(basedonmarkettransactions) andrents(basedoncropshare) aresignificantlyhigherthanKASreportedvalues

Workinprogresstodosomethingsimilarwithpasturerents.

Somerandomthingstothinkabout

DepartmentofAgriculturalEconomics

KansasStateUNIVERSITY

Whoseresponsibilityisittoseetoitthatalandownerscashrentalrateisequitableconsideringcurrentconditions?

1 2

0%0%

Responsibilityforrentalrates

1. Landowner

2. Tenant

Whotypicallyhasbetterinformation?

Whetheryouhaveparticipatedinthemornot,whatisyouropinionofcashrentauctions?

1 2 3 4 5

0% 0% 0%0%0%

Cashrentauctions

1. Ilovethem

2. Theyareokay

3. Imindifferent

4. Dontcareforthem

5. Ihatethem

Cashrentauctions asolutiontoasymmetricinformation?

CashRentAuctionsinIowaFeb24,20122Yearlease(2012and2013)Moneyupfrontfor2012Acwtdavg $486 3347.7 71.0 $6.72Average $476 139.5 73.5 $6.52Min $325 52.1 51.8 $5.57Max $530 421.1 92.5 $8.15Corrwith$/acre 0.362 0.748 0.072

Tract County $/acre Acres CSR $/CSR1 Cass $475 132.6 79 $6.012 Guthrie $525 153.4 81.5 $6.443 Guthrie $525 167.0 76.3 $6.884 Hardin $520 78.1 77.9 $6.685 Hardin $460 59.6 78.6 $5.856 Hardin $510 101.3 83 $6.147 Hardin $530 113.3 92.5 $5.738 Franklin $520 108.4 76 $6.849 Franklin $425 102.1 67.8 $6.2710 Franklin $425 199.4 59.6 $7.1311 Franklin $490 170.3 70.7 $6.9312 Franklin $475 53.9 73.1 $6.5013 Franklin $495 139.7 81.1 $6.1014 Franklin $490 252.7 68.9 $7.1115 Franklin $445 60.2 77 $5.7816 Franklin $460 52.1 82.6 $5.5717 Franklin $325 62.1 51.8 $6.2718 Butler $435 121.7 67.7 $6.4319 Butler $520 421.1 71.6 $7.2620 CerroGordo $490 145.0 72 $6.8121 CerroGordo $500 148.0 71.4 $7.0022 Hancock $450 214.3 55.2 $8.1523 Mitchell $530 221.0 86.1 $6.1624 Mitchell $400 70.4 62 $6.45

$267 $277 $266

$279 $275$252

$246 $193 $217

Source:Edwards,CashRentalRatesforIowa,2012Survey

CashrentauctioninNWKS

CashrentauctioninNWKS

Cropland $/acre Annual Wheat Corn Milo Govt Govtpymt Avg% PPMTract acres(FSA) rent dollars stubblea stalksa stalksa payments peracre orgmatter soiltestP1 214.0 $110 $23,540 108.0 106.0 $3,255 $15.21 2.00 37.50

2 79.7 $90 $7,173 79.7 $586 $7.35 1.50 15.00

3 153.1 $105 $16,076 153.1 $597 $3.90 1.80 17.00

4 160.9 $135 $21,722 160.9 $1,776 $11.04 1.70 15.00

5 314.6 $140 $44,044 226.4 88.2 $3,638 $11.56 1.60 23.00

6 156.0 $140 $21,840 156.0 $1,747 $11.20 1.70 21.00

7 308.7 $130 $40,131 240.0 68.7 $3,441 $11.15 1.74 24.55

8 305.9 $125 $38,238 305.9 $3,847 $12.58 1.80 24.00

9 299.0 $135 $40,365 299.0 $5,465 $18.28 2.00 20.00

10 156.3 $120 $18,756 78.2 78.2 $1,709 $10.93 1.65 21.00

Total 2,148.2 $271,884 735.3 729.9 683.1 $26,061

Overallperacrevalues $126.56 $12.13 1.75 21.80Correlationofcashrentwithabovecolumns> 0.51 0.14 0.04

Munkrescashrentauction,January15,2011

Onlymarginal differences infarmabil ityandlandqualityacross tracts,exceptthattract2hadseveral acres inalagoon.All landis nonirrigated,fairlyflat,l ittleerosion,andhas goodroadandgrainmarketaccess.All landis open,i .e.,nogrowingwheat.Landleasedfor5years andtenantmustensurenoloss ofsoil fertil ityduringleaseterm,i .e.,mustreimburse

Preauctionexpectations l ikelywerecenteredaround$80/acre.LandlocatednearRexfordandGeminbothThomas andSheridancounties,Kansas.landowneratendofleaseforanyreducedfertil ity(bothNandP),asjudgedbybefore&aftersoil tests.

*2010CashrentvaluesasreportedbyUSDANASSandKansasAgriculturalStatistics(KAS).

Kansascountylevelnonirrigatedcropcashrents

So,whatisthemarketvalue?

SD

$36.00($37.50 2011)

TH

$38.00($37.50 2011)

NOSECRETS.Farmlandtenantsgenerallydislikepublicleaseauctionsfortworeasons:1)Theyremovethetraditional,personalrelationshipbondbetweentheowner/tenantandreduceittoanumbersgame;and2)Itpublicizesactualcashrentssoallthelandlordsintheareacancomparehowtheirleasesstackup.

ArticleaboutlandcashrentauctionsinIowa(TheProgressiveFarmer/April2012)

Howwouldyoufeelaboutyourtypicalrentalarrangementifyouwereontheothersideofit?

1 2 3 4

0% 0%0%0%

Yourleasingarrangement

1. Imgettingagooddeal

2. IthinkImgettingtakenadvantageof

3. Seemsaboutright

4. Notsurewhattothink

1.Arelandowners(especiallyabsentee)treatedsimilartootherinputsuppliers?

Doyoudotherightthing?

2. Arefamilymemberstreatedsimilartoothernonrelativebusinesspartners?

3. Regardlessofthesizeofyouroperation,treatitlikeabusiness.

Themoreyoutreatyourfamilyfarmlikeabusiness,andlesslikeafamilyoperation,themorelikelyyoullhaveafamilyfarmtopassontofuturegenerations.

www.agmanager.info/mast Formoreinformationanddecisiontoolsrelatedtofarmmanagement,marketing,andriskmanagementgotowww.AgManager.info

IfinterestedinreceivingweeklyAgManager.infoUpdate oranyofourotherAgEconnewslettersviaemail,pleasecontactKevinDhuyvetterorRichLlewelyn.(Kevin:kcd@ksu.edu 7855323527orRich:rvl@ksu.edu 785.532.1504).

2_Dhuyvetter-Taylor_RentalValues2_Dhuyvetter-Taylor_CashRents.pdf