Farm Management

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Farm Management

• Chapter 20
• Land ? Control and Use

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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 Objectives

1. To explore the unique characteristics of land and
   its use in agriculture
2. To compare the advantages and disadvantages of
   owning and renting land
3. 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
doesnt depreciate or wear out. Land is
immobile and 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 important decisions to be
made by any farmer or rancher. Land acquisition
should be thought of in terms of control.
Control can be achieved by ownership or 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
Value is determined by

1. Soil, topography, and climate
2. Buildings and improvements
3. Size
4. Markets
5. Community
6. Location
7. Competing uses
8. Agricultural program characteristics

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Land Appraisal

• Income capitalization
• Market data

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Income Capitalization
The estimated land value, V, is
R
V
d
where R is the annual net income and d is the
discount rate.
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Market Data
Prices of comparable sales are adjusted for
differences in factors contributing directly to
value as discussed earlier. It is also important
o consider

1. Financing arrangements
2. Relationships of buyer and seller
3. Time of sale

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Table 20-1Estimated Annual Income and Expenses
for Appraisal Purposes
hypothetical 160 acre tract with 150 tillable
acres
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Table 20-2Cash Flow Analysis of the Purchase
ofa 160-Acre Tract at 1,600 per Acre
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Leasing Land
A lease is a legal contract whereby
the landowner gives the tenant the use of
the land for a certain time in return for a
specified payment. Leases on agricultural land
are influenced by local custom. Type, terms,
and length of leases tend to be uniform in an
area.
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Cash Rent
Rent 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)
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Crop Share Leases
Crop share leases are popular in areas where cash
grain farms are common. These leases specify
that the landlord will receive a certain share of
the crop. The tenant usually supplies all
machinery and 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
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Table 20-5Example of Inefficient Fertilizer Use
Under a Crop Share Lease
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Table 20-6Determining Income Shares Under a
Crop Share Lease
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Conservation and Environmental Concerns
Conservation can be defined as the use of farming
practices that will maximize the net present
value of the long-run social and economic
benefits from land use. Ordinary budgeting
techniques are often inadequate for deciding
how best to achieve the goals of conservation.
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Long-Run versus Short-Run Consequences
Most conservation practices require some extra
expenditures. They may also reduce crop yields
in the short run. The short-run reduction in
profit may be necessary to achieve higher profits
in the future or to prevent a long-run decline in
productivity.
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Farming Systems Analysis
Most farms and ranches carry out more than one
type of crop or livestock enterprise. Farming
systems analysis involves understanding how
different enterprises affect each other.
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Off-Farm Effects
Many of the decisions made by farmers and
ranchers have consequences that go far beyond the
boundaries of the farm. Agriculture must consider
more than just farm input costs when making
decisions about input use. The total societal
costs of using various technologies is
becoming an important factor in choosing
practices.
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Regulations and Incentives
Both the federal and state governments have
enacted laws to promote and sometimes require
land use and production practices that preserve
and enhance soil, water, and air resources.
Future conservation efforts may increasingly
become a matter of selecting the
least-cost combination of practices to meet
the relevant 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.