Financing A Farm Financial Feasibility Damona Doye OSU

Financing A Farm: Financial Feasibility Damona Doye OSU Extension Economist damona. doye@okstate. edu 405 -744 -9836

Alternative means of gaining use of assets n Purchase n Lease q Tax lease q Conditional sales contract (also referred to as capital lease or lease-purchase agreement) n Custom hire

Factors to consider n Capital available n Cash flow n Ownership costs n Operating costs n Labor availability n Reliability and timeliness n Pride of ownership n Equity growth potential n Risk

Agecon. okstate. edu/oklandvalues

Farm and Ranch Realities Annual per acre payments: 20 year loan, 20% down

Cash rent as a percent of mortgage payment 70% 60% 50% 40% 30% 20% 10% Crop cash rent to mortgage payment Pasture cash rent to mortgagepayment 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 0%

Purchase n Advantages q Exclusive control 24/7 q Ability to improve, modify q May build equity over time if the asset appreciates in value n Disadvantages q Long-term fixed financial obligations if financed with borrowed money q Less flexibility to change over time q Ownership and operating costs

Lease n Advantages q Lower cash outflows q More flexibility in changing practices without long-term investment n Disadvantages q No equity growth through asset ownership

Custom hire n Advantages q Quality operations with experienced operators q Lower labor requirements q Lower cash outflows relative to ownership q More flexibility in changing practices without long-term investment n Disadvantages q No equity growth through asset ownership?

Tax differences n Purchase q Deduct interest expense associated with loan, if any q Depreciation n Lease q Deduct lease expense q Be aware of rules related to conditional sales contracts n Custom hire q Deduct custom hire expense

References At osufacts. okstate. edu: q. Oklahoma Farm and Ranch Custom Rates, CR-205 q. Oklahoma Pasture Rental Rates, CR-216 q. Oklahoma Cropland Rental Rates, CR-230 q. Machinery Ownership versus Custom Harvest, AGEC-240 q. Capital Leases, AGEC-935 q. Tax Aspects of Leasing, AGEC-940 Investment Analysis course segment