Document Type

Thesis - University Access Only

Award Date

2004

Degree Name

Master of Science (MS)

Department / School

Economics

First Advisor

Burton Pflueger

Abstract

As the value of agricultural land increases over time, land rental rates will also rise. With rising rental rates, producers need to make sound, well educated management decisions when looking to expand their acreage through leasing arrangements. When facing a rental decision, producers need to take into consideration the level of rental payments in regard to the level of commodity prices, the quality of the land being rented, machinery requirements, in addition to the opportunity costs of capital and energy associated with farming additional acres. Most importantly, producers need to be able to identify how the rental decision will affect the overall financial condition of the operation. This becomes the main focus of this research.

This research is designed to analyze how renting addition acreage with differing productive quality and rent levels affects the overall financial condition of the operation. To determine this, a model farm was developed representing a typical farm in East Central South Dakota. This farm was developed using farm level financial data over a five year period from 1999-2003. The farm under went four different rental scenarios. The first scenario was of the financial performance of the base farm over the five year period with no added rental ground. The second scenario included the base farm along with the renting of an additional 160 acres of average productivity land. The third scenario looked at the performance of the base farm renting an additional 160 acres of high productivity land. In the fourth scenario included the base farm renting an additional 160 acres of low productivity land.

The computerized farm planning and analysis tool FINP ACK was used to V compile the financial data and construct complete financial statements for each scenario. These financial statements were then used to compare the performance of each rental scenario to the performance of the base scenario. Net Farm Income, Debt to Asset Ratio, Net Worth and Change in Net Worth were all used to gauge the financial performance of the rental scenarios.

Research results showed that by renting average ground the Net Worth of the operation improves less than $3000 over the five year period. In two of the five years the net worth of the operation renting 160 acres of average productivity ground was less than that of the scenario which did not rent additional ground. By renting 160 acres of highly productive ground the net worth of the operation increased $32,551 over the five year period compared to the base scenario. The net worth of the scenario in which an additional 160 acres of low productivity ground was rented averaged $ 14,000 a year less over the five year period than the base scenario which did not rent additional ground. By renting high productivity ground instead of low productivity ground the operation could have made over $ 12,000 a year more in net farm income improving net worth more than $60,000 over the period.

These results show how land quality and its associated rent levels can affect the overall financial condition of the operation in a rental situation.

Library of Congress Subject Headings

Farms -- Finance.
Farm rents.
Farms -- Valuation.
Farm management.

Publisher

South Dakota State University

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Rights Statement

In Copyright