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Surviving the Risk A look at lease agreements,
budgets, marketing and more!
Jenny Rhodes Shannon Dill John Hall Extension
Educators, Agriculture Natural Resources

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Jenny Rhodes Shannon Dill John Hall Extension
Educators, Agriculture Natural Resources

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  University of Maryland Extension

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(No Transcript)
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• Crop Budgeting
• Communication
• Leasing
• Marketing

Jenny Rhodes Shannon Dill John Hall Extension
Educators, Agriculture Natural Resources

• 
  University of Maryland Extension

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• Crop budgeting

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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

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5 Parts of a Budget

• Investment
• Gross Income
• Variable Costs
• Fixed Costs
• Net Income

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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

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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
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Cost Components

• Fixed Costs
• Fixed costs are expenses that do not vary with
  the level of output.
• Building costs
• Machinery costs
• Taxes
• Insurance
• Mortgage

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DIRTI

• Deprecation
• Interest
• Repairs/Maintenance
• Taxes
• Interest

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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

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Net Income
TOTAL VARIABLE AND FIXED COST LISTED ABOVE       542.78
NET INCOME OVER VARIABLE FIXED COSTS LISTED ABOVE 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
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Break Even Analysis
Slide Adapted from Dr. Wen-fei Uva Department
of Applied Economics and Management Cornell
University
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Landlord-Tenant Relationships
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Maryland Extension
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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

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Guidelines for Tenants

• Keeping the Landlord Happy
• no different from an
• Effective Public-Relations Strategy in any
  Business

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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

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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

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Guideline for Tenants

1. Alert landlord of problems
2. Document in writing
3. Improve appearance
4. Acknowledge life events
5. Encourage landlord visits to your farm
6. PAY EXPLICIT ATTENTONTO THE NEXT GENERATION OF
   OWNERS!

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Guideline for Landlords

• Have a written lease
• Ask questions
• Provide information about objectives
• Stay informed
• Schedule yearly meetings
• Be rational

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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

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Resume
Frank Farmer 100 Better Farmer Lane Centreville,
Maryland 21617 [phone] Fax (410)
758-9988 E-mail ffarmer_at_baybroadband.net Educatio
n B.S., Agriculture Studies, University of
Maryland, 1983 Queen Annes 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
crop progress, market news, and new technologies
I am incorporating into my operation.
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• 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 Organizations
• Farming Background
• Involved in farming 1,000 acres of crop land in
  QueenAnnes, Talbot and Kent counties.
• Own 400 acres
• Rent 600 acres
• Typical yields
• Corn135/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 Voucher
• Organizations
• Queen Annes County Extension Grain
  Marketing Club
• LEAD Maryland Foundation Class IV
• Queen Annes County Farm Bureau

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• References
• Available Upon Request (see below)
• (Have these with you in case the landowner
  requests these while talking to him/her)
• - Separate Page-
• References
• Larry Landowner
• 1111 My Farm Lane
• Easton, MD 21601
• Phone Number 410-822-0000
• Albert Ag Lender
• MidAtlantic Farm Credit
• Main Street
• Chestertown,MD 21610
• Phone Number 410778-9999

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Summary

• It is all about Communication
• Be Professional
• Relationships are important
• Find the best means of communication for you and
  your business

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Leases Written Share the Risk
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Farm Lease Agreement Written
agreement Components

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• Lease Components
• Names of Parties and description of property
• Term of Lease
• Rental Rates and arrangements
• a. Crop-share
• b. Cash Lease
• c. Flexible cash lease
• d. livestock share lease
• e. Farm Machinery, equipment and building
  leases

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• Lease Components Cont.
• 4. Farm operating expenses
• 5. Conservation and Improved Practices
• 6. Improvements and repairs
• 7. Records
• No Partnerships statement
• Right of Entry
• Arbitration ( settlement)
• Additional agreements and modifications
• Signatures

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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

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Value of a written lease The value of a written
contract is in helping the prospective landowner
and tenant think about and agree upon the
essential considerations of leasing and operating
the farm. To arrive at an equitable lease, the
interested parties should talk over the basic
considerations involved in the leasing
arrangement and in managing the farm. They should
then make a contract, preferably written,
based on these considerations.

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• 1 Names of parties and description of property
• Every lease should identify the parties entering
  into
• the lease contract and give the legal description
  of the
• property or properties involved. In addition to
  the legal
• description, information such as the distance and
  direction from town, road name, mailing address
  and popular name of the farm might be given.

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2 Term of lease The 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 lease is
often necessary to develop a profitable business
over time because of the need for permanent
capital investments. The tenant will not want to
share investment in permanent facilities on a
short-term lease. Usually, landowners favor a
short-term lease on the basis that a longer-term
lease lowers the market value of the farm because
it cannot readily be sold. This problem can
be solved by including a termination clause that
would apply in case the farm was sold.

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The lease agreement can be for either a
one-year lease or a longer lease, as desired.
Most agreements include an automatic renewal
clause and allow some flexibility in the terms of
the lease if the parties under contract 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

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• Termination of lease
• It is recommended that a termination notice be
  given by July 1 of the growing season.
• If termination is given, the operator has the
  right to harvest all crops currently growing on
  the given land.
• If there are crop input costs for crops currently
  growing, these input costs should be addressed at
  the time of termination.

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In some communities, it is customary to give
notice that the lease is to be terminated before
wheat sowing time in the fall or by March 1 in
the spring. But failure of either party to give
this notice does not necessarily indicate a
desire that the lease be continued. Consequently,
it is desirable to state in the contract
the procedures to be followed for terminating or
continuing the lease contract.

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• 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
• crop-share rent share crop
• livestock-share rent
• cash rent
• Flexible cash rent
• farm machinery, equipment and buildings rent
  custom farming

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• a. Crop-share rent Characteristics of a
  crop-share
• lease are that each party receives a share of the
  crop as
• earnings for their contribution in land, labor
  and capital.
• Payment could be in Bushels
• Normally, crop-sharing involves grain crops such
  as
• small grains, corn, and soybeans and land used to
• participate in government programs. Remaining
  areas
• used in producing forages (hay and pasture) are
  normally
• cash rented.
• The landowners share of the crop depends on the
• contribution made toward production of the crop.
  When
• crops are divided 50-50, the landowner normally
  pays
• 50 percent of the cost of fertilizer, seed and
  chemicals in
• addition to providing the land. In other
  instances, the
• landowner may or may not share in cash production
• costs and receives a 1/4 to 1/3 share of the crop
  as a return
• to land.

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• .

b. Livestock-share lease Livestock-share leases
vary considerably because of differences in
contributions made to the business by each party.
The owner normally furnishes land and buildings,
while the tenant furnishes major portions of the
crop machinery. Livestock is owned jointly.
Production costs such as feed, veterinary and
medicine, other livestock expenses, fertilizer,
seed and chemicals are shared equally. Livestock
machinery and equipment may be jointly owned.
Labor costs are shared according to the
agreement, as are repairs and upkeep on permanent
buildings. The landowner usually pays for
construction of permanent buildings, or
arrangements are made to reimburse the tenant in
case the lease is terminated. Livestock and crop
sales are divided according to the terms of the
agreement

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• c. Cash lease The cash lease is normally
  uniform and
• relatively simple. The tenant pays the landowner
  a cash
• sum per acre or a lump sum for his or her
  investment
• in farm resources. Provisions in the lease
  generally state
• the terms of agreement. For example, the
  landowner
• may place restrictions on the use of land or
  fields for certain
• crops. Also, the agreement might state the degree
• of productivity to be maintained. Provisions
  should also
• state 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

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d. Flexible cash lease The flexible cash lease
is a hybrid of the cash lease. The flexible cash
lease agreement states that the tenant will pay
in proportion to either or both the price and the
yield level. There are many methods for flexing
the rental agreement. The most common method is
flexing gross (or net) revenue so that the tenant
and landowner share the risks associated with
cash renting. If revenue is greater than
the established base level, the tenant and
landowner share the excess revenue. If revenue is
less than the established level, the tenant and
landowner share the lost revenue. However, often
there is a cash lease price floor that
the landowner is guaranteed. Other types of
flexible cash rental arrangements include flexing
only price or yield or flexing both

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e. Farm machinery, equipment and buildings leases
Renters have found that leasing unused
resources can be cheaper than making new capital
investments. Also, producers have found in
certain situations leasing machinery and
equipment from dealers can be cheaper than
purchasing. Additionally, machinery and
equipment leasing arrangements can be between
renters and owners to allow the renter to avoid
paying full value and the owner to generate
revenue to cover the ownership costs. Renters
need to compare the size, condition, obsolescence,
use, location and lease cost of the capital good
versus the cost of purchasing the capital good
outright. Owners are primarily interested in
recovering ownership costs. The lease price
should equal the amount needed to cover ownership
costs and variable costs, such as upkeep costs
incurred from renting the capital good. Both
renters and owners should consider current value,
depreciation, interest, insurance and taxes,
inflation, repairs and maintenance when
agreeing on a lease value.

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• The cash lease is the most common. The second
• most often used is the crop-share lease. Flexible
  rental
• agreements are increasing in use as tenants seek
• to share downside revenue risk with landowners
  and
• landowners seek to capture upside revenue
  potential.
• The rental arrangement for each specific farm
  should be
• developed 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.

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4 Farm operating expenses Reaching
agreement on farm operating expenses provides an
opportunity for the tenant and landowner to
discuss and designate the share of cash
production costs 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

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• 5 Conservation and improved practices
• To improve or maintain the productivity of the
• farm, conservation and improved production
  practices
• are usually warranted. Normally, conservation and
• other improved farming practices require
  additional
• labor and expenditures. Give important
  consideration
• to questions such as who contributes the labor
  and cost
• of implementing the practice and how these
  contributions affect income for both tenant and
  landowner.
• CRP cutting waterways spraying noxious weeds

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• 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

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• 7 Improvements and repairs
• Misunderstanding is prevented by agreeing ahead
• of time what repairs will be done, how much will
  be
• done and what each party will furnish toward
  them.
• In many instances, tenants provide equipment that
• legally becomes permanent fixtures on the farm.
• Disagreements can be avoided and the farms
  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

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8 Records Farm records are a necessary part of
farming. The records need not be elaborate or
formal accounts but at least should cover all the
expenses affecting both parties. The tenant is
the logical person to keep the records because he
or she is usually in closer touch with the day
to- day operations. If the records are kept as
part of a complete farm account record, they will
have greater value to the total
business. Nutrient management plans maybe part
of the records shared. They include 1. soil
tests 2. nutrient inputs 3. Yield
records Owners can get copies if
requested Pesticide records may also be part of
the records shared

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• 9 No partnership
• A lease does not create a partnership. A
  statement
• of this nature is advisable in any lease form.
• Rental arrangements involving livestock-share
• leases are more apt to be considered partnerships
  than
• the crop-share arrangements, but such
  arrangements are more likely to be considered
  modifications of the
• landowner-tenant relationship as traditionally
  established under the crop-share lease.

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10 Right of entry Every farm lease agreement
should include a statement giving the landowner
the legal right to enter the property. Without
such a statement, a tenant has the right to treat
any entrant on the property as a trespasser,
including the landowner

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11 Arbitration (settlement) Differences of
opinion can arise rather unexpectedly. For this
reason, leases should be in writing. Time tends
to make oral agreements hazy while a
written agreement is always available for
reference and recall. Also, a written lease
forces both parties to argue out their
differences in most areas where differences
of opinion 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

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• 12 Additional agreements and modifications
• It is often necessary to change or add to
  contractual
• arrangements, 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

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• 12 Signatures
• Signatures by each party are one of the five
  essential
• parts of the lease contract. The agreement
  becomes a
• contract when it is signed. All co-owners of the
  property,
• including husband and wife, should sign the lease
• agreement 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.

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Our goal is to suggest lease agreements that
will Reduce Risk

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• Risk considerations
• Crop Input costs
• Machinery costs
• Fuel costs
• Land costs
• Volatile commodity markets
• A very troubled monetary system

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• Famer controlled costs
• Crop Input costs
• Machinery costs
• Fuel costs

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• What can you do to control Crop Input costs?
• Seed
• Fertilizer
• Herbicides
• Insecticides
• Tillage methods

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What can you do to control Machinery costs?

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DIRTI Method to determine cost of
ownership D- Depreciation I Interest R
Repairs T Taxes I - Insurance

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Depreciation Definition a. tax
purposes b. real value purposes (amortize)

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Depreciation - Real b. real value
purposes 200,000 combine 8
years Residual value 50,000 What are annual
costs? 150,000/8 18,750.00 per year

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• DIRTI 200,000 combine
• Ownership costs
• Amortization 18,750.00
• Interest 50 at 9 9,000.00
• Repairs 1 2,000.00
• Taxes
• Insurance 1 2,000.00
• Annual ownership costs 31,750.00

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Machinery costs What are real combine costs at
31,750.00 per year per acre? a. 500
acres 63.50 b. 1000 acres 31.75 c. 1500
acres 21.17 d. 2000 acres 15.87

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Fuel costs 1. Assume 12 gallons per hour 2.
4.00 per gallon 3. 3 acres per hour 12
4.00 48.00 / 3 16.00 per acre

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What about Labor? Assume 15.00 per hour
(salary plus any benefits) Remember Health care
- 5,000 5.00 per acre

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Total Costs for combining 500 acres 1000
acres 1. Ownership 63.50 31.75 2. Fuel
16.00 16.00 3. Labor
5.00 5.00 Real costs
84.50 52.75 Per acre

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Total Costs for combining 1500 acres 2000
acres 1. DIRTI 21.17 15.87 2. Fuel
16.00 16.00 3. Labor 5.00
5.00 Real costs
42.17 36.87 Per acre

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Ownership costs
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

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Suggestion Custom rates should be a.
ownership costs Plus b. Fuel
c. labor

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Land Costs

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Rental rates and arrangements Cash
Rental Rates Determine a fair rate
Crop-Share Leases Calculating a Cash Rent
Lease Flexible Cash Leases

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Cash rental rates
How can you determine one rental rate when gross
sales varies from 225.00 to 810.00?

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• 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.

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• Land Rental rates and arrangements-
• Crop-Share Leases
• Cash Rental Rates
• 3. Flexible Cash Leases

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Maryland Cash Rent by County NASS UDSA Annapolis
County 2005 2006 2007 Caroline 81.2
6 75.68 73.65 Cecil 72.31 74.44
72.19 Dorchester 81.56 76.92
77.54 Kent 83.08 83.12 89.13 Queen
Anne 90.47 91.81 92.18 Somerset 62.5
7 63.55 64.68 Talbot 76.71 83.12
83.02 Wicomico 71.45 73.20
73.21 Worchester 75.04 80.64 82.38
Does not include 2008

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Calculating Cash Rent
Maryland data 2 a. Average Rents Per Unit Corn
Yield Determine Average Rent for Corn
Farms Average Corn Yield (bu/A) 125 Equals
the Average Rent for Corn Acre 100 Rent per
bushel of Corn yield 0.80

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Rental rates based on soil productivity James
Brewer Resource Soil Scientist USDA-NRCS Easton,
MD

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Rental rates based on soil productivity
groupings, yield potential and value Group 1 150
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

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Additional Iowa Cash Lease Calculations
A. Gross Income Method B. Tenant Residual
Method C. Crop Share Method D. Return on
Investment Method

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A. Share of Gross Income
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. CORN687/ac X 35 240.45 4b.
SOYBEANS368.50/ac x 40 147.40 Average

193.93

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B. Tenant Residual Method Current - Md
CORN 475.00 482.63 -7.63 SOYBEAN
308.00- 357.10 (-49.10) Average
-28.37 Price and yield is
everything

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C. Crop Share Method 50-50 Share
12/3/2008 Prices Corn 50 of gross
minus owners costs 475/2 237.50
(377.89/2(188.95)) 48.55 Soybeans 50 of
gross minus owners costs 308/2 154-(208/2(
104.00) 50 Average49.28 (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.

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Future Consideration

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Gross sales variation

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

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Cash rental rates
How can you determine one rental rate when gross
sales varies from 225.00 to 810.00?

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Flexible Cash Leases
Desire Stable and predictable rents. Current
Reality Prices and yields are very
unpredictable. Potential Solution Flexible
lease contract

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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.

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Types of Flexible Cash Leases
Rent varies with both price and yield
Matches tenants 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

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Grain MarketingWinning the Game
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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

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THANK YOU!www.mdgrainmarketing.umd.edu

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  University of Maryland Extension