CHAPTER 20 LEASE AND LAND PURCHASE ANALYSIS The purposes of this exercise are to: (1) compare the cost of cash and crop share lcasing (2) estimate the maximum cash rent that you can afford to pay (3) estimate the economic value of farm land based on its projected future carnings A Crop Share versus Cash Rent Lease Analysis Use information from 3 years of crop production records to compare how much it cost (or would have cost) to rent land under a crop share lease compared to a cash lease. The indirect cost of a crop share lease can be computed by estimating (1) the value of the land owner's share (50%) of the gross income, minus (2) the value of the land owner's shure (50%) of the input costs (seed, fertilizer, pesticides and drying) Round Values to the nearest whole $ Year Year 2 SALE Year Son $4.95 Soybeans 11.75 Corn $3.40 Soybeans $8.60 Com $6.10 Seyhans $11.00 166 48 180 60 150 42 3 4 5. 1. Average selling price, Sibu 2 Average yield, bu./a. Gross income, S/acte (price x yield) Average gross for corn and soybeans Landowner share of gross income (half) Value of input costs, S/acre 7. Average input cost for com and soybeans Landowner share of input costs (hall) Net cost of crop share rent (5 minus 8) 10. Cash rent in same year 11. Which type of rent was cheaper? 6 $296 $136 $296 $136 5296 5136 8 9 5210 5210 S210 12. In what type of year would you expect a crop share lease to be cheaper than a cash lease? More expensive? 11. Which type of lease arrangement would you consider to be the riskies for the tenant and why? Foc 10 Ptv . W P $/acre B. Maximum Cash Rent Analysis Estimate your added income and added costs from cash renting more land, identical to the land you already own. Round values to the nearest S. 1. Average gross income per acre (line A.4, average of years 1-3) 2. Average input costs per acre (line A.7, average of years 1-3) $150 3. 4. Machinery costs per acre, variable plus fixed Labor cost per acre (3 hours per acre x $10 per hour) Total added costs (2 + 3 + 4) 5. 6. Added net income per acre from land rental (line 1 minus line 5). This is the most you could pay for cash rent and just break even. Of course, if you must invest in larger machinery, you will have additional fixed machinery costs, as well. c. Value of Land (income capitalization approach) The net income that could be earned from renting land would also be available if you purchased the land. You would not have to pay cash rent, but you would have to pay property taxes. 1. Net income per acre from additional land (line B6) 2. Minus property taxes per acre $20 3. Equals added net income per acre from a land purchase Since the expected useful life of land is unlimited, the present value of the land can be found by simply dividing the annual added net income by the real discount rate. Part of the cost of investments in fixed assets like farm land is offset by appreciation in value over time. To take this into account we can subtract the expected rate of inflation from the discount (or interest) rate to get a "real" discount rate. 4. Long-term interest rate 7.00% Expected rate of inflation in land values 2.00% "Real discount rate 5.00% 5. Added net income (C.3) $ 7.05 - $ per acre, estimated land value. off-farm income. In this lab, line A 4 is the average of line 3. So, for example, if corn gross is 200 and soybean gross is 300, Ine A4 will be 250, and line 5 will be half of that, 125 Everything else i believe should not provide any difficulty, as you are been guided. - Original Message ... Sent on Monday, November 23, 2020 7:43 PM Thank you. There no new material to cover. CHAPTER 20 LEASE AND LAND PURCHASE ANALYSIS The purposes of this exercise are to: (1) compare the cost of cash and crop share lcasing (2) estimate the maximum cash rent that you can afford to pay (3) estimate the economic value of farm land based on its projected future carnings A Crop Share versus Cash Rent Lease Analysis Use information from 3 years of crop production records to compare how much it cost (or would have cost) to rent land under a crop share lease compared to a cash lease. The indirect cost of a crop share lease can be computed by estimating (1) the value of the land owner's share (50%) of the gross income, minus (2) the value of the land owner's shure (50%) of the input costs (seed, fertilizer, pesticides and drying) Round Values to the nearest whole $ Year Year 2 SALE Year Son $4.95 Soybeans 11.75 Corn $3.40 Soybeans $8.60 Com $6.10 Seyhans $11.00 166 48 180 60 150 42 3 4 5. 1. Average selling price, Sibu 2 Average yield, bu./a. Gross income, S/acte (price x yield) Average gross for corn and soybeans Landowner share of gross income (half) Value of input costs, S/acre 7. Average input cost for com and soybeans Landowner share of input costs (hall) Net cost of crop share rent (5 minus 8) 10. Cash rent in same year 11. Which type of rent was cheaper? 6 $296 $136 $296 $136 5296 5136 8 9 5210 5210 S210 12. In what type of year would you expect a crop share lease to be cheaper than a cash lease? More expensive? 11. Which type of lease arrangement would you consider to be the riskies for the tenant and why? Foc 10 Ptv . W P $/acre B. Maximum Cash Rent Analysis Estimate your added income and added costs from cash renting more land, identical to the land you already own. Round values to the nearest S. 1. Average gross income per acre (line A.4, average of years 1-3) 2. Average input costs per acre (line A.7, average of years 1-3) $150 3. 4. Machinery costs per acre, variable plus fixed Labor cost per acre (3 hours per acre x $10 per hour) Total added costs (2 + 3 + 4) 5. 6. Added net income per acre from land rental (line 1 minus line 5). This is the most you could pay for cash rent and just break even. Of course, if you must invest in larger machinery, you will have additional fixed machinery costs, as well. c. Value of Land (income capitalization approach) The net income that could be earned from renting land would also be available if you purchased the land. You would not have to pay cash rent, but you would have to pay property taxes. 1. Net income per acre from additional land (line B6) 2. Minus property taxes per acre $20 3. Equals added net income per acre from a land purchase Since the expected useful life of land is unlimited, the present value of the land can be found by simply dividing the annual added net income by the real discount rate. Part of the cost of investments in fixed assets like farm land is offset by appreciation in value over time. To take this into account we can subtract the expected rate of inflation from the discount (or interest) rate to get a "real" discount rate. 4. Long-term interest rate 7.00% Expected rate of inflation in land values 2.00% "Real discount rate 5.00% 5. Added net income (C.3) $ 7.05 - $ per acre, estimated land value. off-farm income. In this lab, line A 4 is the average of line 3. So, for example, if corn gross is 200 and soybean gross is 300, Ine A4 will be 250, and line 5 will be half of that, 125 Everything else i believe should not provide any difficulty, as you are been guided. - Original Message ... Sent on Monday, November 23, 2020 7:43 PM Thank you. There no new material to cover