Farm Management
Chapter 20
Land Control and Use
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 20-1
Farmland 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 doesn’t
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 20-2
Average 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 20-1
Estimated Annual Income and Expenses
for Appraisal Purposes
Income Acres Yield (bu) Price Total
Corn 100 135 $2.50 $33,750
Soybeans 50 40 6.70 13,400
Total Income 47,150
Expenses
Fertilizer 6,500
Seed 3,350
Pesticides 4,500
Trucking 500
Drying 1,300
Labor and management 4,500
Machinery
Ownership costs 5,500
Operating costs 3,000
Property taxes and insurance 2,800
Repairs and maintenance 500
Depreciation of buildings, fences 800
Total expenses $33,250
Annual net income $13,900
Capitalization of income:
Capitalization rate Total value per acre
8% ($13,900/0.08) = $173,750 $1,086
6% ($13,900/0.06) = $231,667 $1,448
4% ($13,900/0.04) = $347,500 $2,172
hypothetical
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Table 20-2
Cash Flow Analysis of the Purchase of
a 160-Acre Tract at $1,600 per Acre
Year 1 Year 2 Year 3 Year 4 Year 5
Cash receipts ($) 47,150 48,565 50,021 51,522 53,068
Cash Expenditures
Seed, fertilizer, pesticides, 16,150 16,635 17,134 17,648 18,177
trucking, drying
Machinery 5,750 5,923 6,100 6,283 6,472
Family living 4,000 4,120 4,244 4,371 4,502
Taxes, repairs 3,300 3,399 3,501 3,606 3,714
Annual loan payments ($)
Principal 8,320 8,320 8,320 8,320 8,320
Interest 13,312 12,646 11,981 11,315 10,650
Total cash outflow ($) 50,832 51,043 51,280 51,543 51,835
Net cash flow ($) -3,682 -2,478 -1,259 -21 1,233
Assumes a down payment of $89,600 with the balance financed by a 20-year loan of
of $166,400 at 8% interest with equal principal payments made annually.
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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 20-3
Average cropland cash rental rates
per acre, by region
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Table 20-3
Setting a Fair Cash Rent (160 acres)
1. Landowner's Costs
Opportunity cost on investment $240,000 x 5% = $12,000
Property taxes and insurance 2,800
Maintenance 500
Depreciation 800
Total 16,100
Total cost per acre $101
2. Tenant's Residual
Gross income $47,150
Expenses
fertilizer 6,500
seed 3,350
Pesticides 4,500
trucking 500
drying 1,300
labor and management 4,500
machinery 8,500
Total expenses 29,150
Net income available to pay rent 18,000
Net income available per acre $113
3. Crop share equivalent
Additional income: $47,150 x 50% = $23,575
Additional expenses:
fertilizer 6,500 x 50% 3,250
seed 3,350 x 50% 1,675
Pesticides 4,500 x 50% 2,250
trucking 500 x 50% 250
drying 1,300 x 50% 650
Total additional expenses $8,075
Additional net income $15,500
Additional net income per acre $97
4. Share of gross income
Gross income $47,150
Share of total costs from land 35%
Share of gross income to land $16,502
Estimated rent per acre $103
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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 20-4
Comparison of Lease Types
Fixed Variable Fixed Crop or Custom
cash cash bushel livestock share farming
Price risk borne by: Tenant Both Both Both Owner
Production risk borne by: Tenant Both Tenant Both Owner
Operating capital supplied by: Tenant Tenant Tenant Both Owner
Management decisions made by: Tenant Tenant Tenant Both Both
Marketing done by: Tenant Tenant Both Both Owner
Terms adjust: Slowly Quickly Medium Quickly Slowly
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Table 20-5
Example of Inefficient Fertilizer Use
Under a Crop Share Lease
Total marginal Tenant's
Marginal value product, marginal
Fertilizer Yield input cost at corn at value
(lb) (bu) $0.20/lb ($) $2.20 per bu ($) product ($)
60 95 4.00
80 100 4.00 11.00 5.50
100 104 4.00 8.80 4.40
120 107 4.00 6.60 3.30
140 109 4.00 4.40 2.20
160 110 4.00 2.20 1.10
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Table 20-6
Determining Income Shares
Under a Crop Share Lease
Cash Item Whole Farm Owner Tenant
Fertilizer $6,500 $3,250 $3,250
Seed 3,350 1,675 1,675
Pesticides 4,500 2,250 2,250
Trucking 500 0 500
Drying fuel 1,300 650 650
Labor, management 4,500 0 4,500
Machinery ownership 5,500 0 5,500
Machinery operating 3,000 0 3,000
Property taxes, insurance 2,800 2,800 0
Repairs and maintenance 500 500 0
Depreciation of buildings, fences 800 800 0
Opportunity cost for land 12,000 12,000 0
Total costs $45,250 $23,925 $21,325
Percent contributed 53% 47%
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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.
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