Question

LEASE AND LAND PURCHASE ANALYSIS

The purposes of this exercise are to:

(1) compare the cost of cash and crop share leasing

(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 earnings

(4) look at the cash flow implications of financing a land purchase

A. Crop Share Versus Cash Rent Lease Analysis

Use information from 3 years of crop production records to compare how much it actually 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:

the value of the land owner's share (50%) of the gross income, minus

the value of the land owner's share (50%) of the input costs (seed, fertilizer, pesticides and drying).

Round values to the nearest whole $	Year 1			Year 2			Year 3
	Corn	Soybeans		Corn	Soybeans		Corn	Soybeans
1. Average selling price, $/bu.	$1.95	$5.75		$2.40	$6.60		$3.10	$8.00
2. Average yield, bu./a.	166	48		180	60		150	42
3. Gross income, $/acre (price x yield)	______	______		______	______		______	______
4. Average gross for corn and soybeans	______			______			______
5. Landowner share of gross income (half)	______			______			______
6. Value of input costs, $/acre	$140	$88		$150	$94		$160	$100
7. Average input cost for corn and soybeans	______			______			______
8. Landowner share of input costs (half)	______			______			______
9. Net cost of crop share rent (5 minus 8)	______			______			______
10. Cash rent in same year	$132			$132			$132

Answer 1

To calculate the various columns in the table, we multiply and do the costing:

Round values to the nearest whole $	Year 1		Year 2		Year 3
	Corn	Soybeans	Corn	Soybeans	Corn	Soybeans
1. Average selling price, $/bu.	$1.95	$5.75	$2.40	$6.60	$3.10	$8.00
2. Average yield, bu./a.	166	48	180	60	150	42
3. Gross income, $/acre (price x yield)	$323.70	$276.00	$432.00	$396.00	$465.00	$336.00
4. Average gross for corn and soybeans	299.85		414		400.5
5. Landowner share of gross income (half)	149.93		207		200.25
6. Value of input costs, $/acre	$140	$88	$150	$94	$160	$100
7. Average input cost for corn and soybeans	114		122		130
8. Landowner share of input costs (half)	57		61		65
9. Net cost of crop share rent (5 minus 8)	92.93		146		135.25
10. Cash rent in same year	$132		$132		$132

a. For year 1, the cash rent is higher than the net cost of crop share rent paid. However for year 2 and 3, the cash rent is lower than the cost of crop share rent.

b. The maximum rent that can be paid should be equal to the net cost of crop share rent. Hence in year 1 the maximum rent that can be paid is 92.93 dollars. In year 2, the maximum rent that can be paid is 146 dollars. In year 3, the maximum rent that can be paid is 135.25 dollars.