Capital Improvements

Howard HaldermanDavid Martin

Adam Gore

The Investor

Farmland Investors/Owners

Types of Investors:- Individuals- Corporations- Private Equity Funds- Pension Funds- Other Institutional Investors

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Investors buy …

» Solid Returns˃ Farmland viewed as a “blue-chip” stock˃ Strong capital value growth (5% CAGR in US)˃ Steady dividend (cash) income (3-4% ROI)˃ Nearly zero vacancy rate

» Inflation hedge˃ Farmland positively correlated to inflation

» Good portfolio diversification˃ Farmland returns negatively correlated to other

investments.

The Key . . .

Execution

The Challenge is Execution:

1) Investment Thesis and Parameters2) Acquisition Strategy3) Management of Assets4) Reporting5) Mark to Market Valuation

The Solution . . .

Execution

Hire the Right Professional(s) Who Will:

1) Develop the Investment Thesis & Parameters2) Develop and Execute Acquisition Strategy3) Manage Your Assets4) Report5) Perform Mark to Market Valuations

Cap Ex . . . Why?

Capital Improvements

What Should an Investor Consider:

1) Value Add Strategies2) Improvement Enhances Value of the Farm3) Improvement Increases Income Potential4) Improvement Reduces Risk5) Improvement Improves IRR while Reducing

Risk

Cap Ex Projects ...

Capital Improvements

What Projects Make Sense:

1) Irrigation (Flood/Land Leveling and Center Pivot)

2) Drainage3) Grain Storage4) Farm Headquarters Enhancements5) Improvements that Add Value to Production

Cap Ex Finance ...

Capital Improvements

Financing:

1) Equity2) Leverage (if cost of debt less than ROI)3) Combination4) Joint Venture with Producer/Partner

Execution ...

Capital Improvements

Project Manager Execution:

1) Research Improvement Need and Thesis2) Develop Investment Recommendation3) Present Plan4) Secure Bids – Recommend Partner5) Oversee Project Development (GC)6) Provide Interim Reports and Final Summary

Data based out of Louisiana.

Adam Gore

Land Leveling

What is it?

» Process for raising or lowering the elevation of certain areas in a field to allow irrigation.˃ Most common form of irrigation method in the Delta.˃ “Zero Grade”

+ field is perfectly level throughout.+ Better suited for rice where a constant flood is preferred.

˃ “Graded”+ 0.1 to 0.2 in. change in elevation every 100 to 200 ft.+ Allows the water to move more quickly to end of the field.+ Improves draining of the field.+ Better suited for corn, soybeans, milo, and cotton.

http://moteslandleveling.com/contact

Equipment

» Size of project determined by yards of dirt per acre.

» Dirt buckets˃ Typically 10-25 yards

» Laser Levels˃ Used to measure elevation of

different places in the field.

Why Do it?

» Increases productivity of the land.» Improves drainage.» Usually leads to higher land rent.» Increases demand of farm, attracting more

quality tenants.» Increase in future land values» Decreases some production risk.

What does it cost?

1 acre= 500 yards leveled Cost per acreFuel ($1.30/ yd at $4/ gal) $ 650 Survey $ 20 Land Preperation for dirt buckets $ 10 Drainage Pipe $ 35 Site Prep, Clearing, and Ditching $ 100 Irrigation Pipeline $ 175 Irrigation Risers $ 25 Irrigation Pumps $ 75 Management Fee $ 25 Total $1,115.00

Cash Rent Return

Dry Land Rent (per ac.) $ 90

Irrigated Rent (per ac.) $ 160

Net Increase $ 70

Annual ROI 6.3%

Crop Share Return

Dry Land Soybeans Irrigated SoybeansYield (bushels per ac.) 30 60

$ per bushel $ 13.00 $ 13.00

Total Revenue $ 390.00 $ 780.00

Owner's Share ($/ac.) $ 97.50 $ 195.00 Annual ROI= 8.74%

Crop Share Return cont’d.

RiceIrrigated Soybeans

Dry Land Soybeans

Yield (bushels/ ac.) 160 60 30$ per bushel $ 6 $ 13 $ 13 Total Revenue $ 936 $ 780 $ 390 Owner's Share ($/ac.) $ 234 $ 195 $ 98

Annual ROI= 3.50% 12.24%

Increase in Land Value

Before Development

After Development

Dry Land FMV $ 1,750 $ 1,750 Total Land Investment $ 1,750 $ 2,865 Cash Rent $ 90 $ 160 Cap Rate 5.14% 5.14%FMV based on Cap Rate $ 1,750 $ 3,111

Value Increase $ 246

Data based out of Central Indiana.

David Martin

Subsurface Drainage

What is it?

» Buried corrugated tubing.» A way to get water off a farm quicker.» Runs at a .2% grade.» Can drain 30- 40 ft on both side of tile,

depending on soil type, depth and width of tile.

Why do it?

» Reduces risk.» Decreases the chance of

losing vital fertilizer.» Increases productivity.» Allows earlier entry.» Increases value of the

farm.» Allows for better micro-

organism activity.

Types of Tiling

Pattern Tile Spot Tile

Pattern Tile

» Evenly drained.» In a year with above

average rainfall, removes water quicker.

» Earlier field entry. » Less compaction

during planting.

Spot Tile

» Lower cost.» Can be installed after

planting or after harvest.

» Quick results if limited on capital expenditures.

Central Indiana

Corn

Pre- Tile Post Tile

Soybeans

Pre- Tile Post Tile

Per Acre Costs (16.5 ac.)

Feet Cost Feet CostLabor 3,380 1.00$ 8,759 0.30$ Tile4" 7,629 0.45$ 5" 2,250 0.67$ 8" 1,130 1.86$ 1,130 1.86$

Total per acre 423.59 494.70

Spot Tile Pattern Tile

Revenue

Pre-Tile Spot Tile Pattern TileCorn Price 5.50$ 5.50$ 5.50$ Yield 180 190 195Revenue 990.00$ 1,045.00$ 1,072.50$

Pattern Tile ROI

Pre-Tile Pattern TileRevenue 990.00$ 1,072.50$ Base Rent 180.00$ 200.00$ Farming Expenses 550 550Total Income 260.00$ 322.50$ Owner's Share (30%) 78.00$ 96.75$ Total Lease Pymnt 258.00$ 296.75$

Increase in Lease 38.75$ ROI 7.83%

Spot Tile ROI

Pre-Tile Spot TileRevenue 990.00$ 1,045.00$ Base Rent 180.00$ 200.00$ Farming Expenses 550 550Total Income 260.00$ 295.00$ Owner's Share (30%) 78.00$ 88.50$ Total Lease Pymnt 258.00$ 288.50$

Increase in Lease 30.50$ ROI 7.20%

Grain Storage Considerations

Grain Storage Advantages

» Avoid selling grain at seasonally low harvest prices

» Quicker transportation of grain from the field to storage facilities

» Allows the grower to harvest grain at higher moisture and condition the grain on the farm without receiving a discount from commercial elevators

» Marketing Flexibility

August

September

October

November

December

January

Febru

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May

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July

-20

-15

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North Carolina Seasonal Corn Basis

Series1

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/ Bu

shel

*USDA-AMS 99-2010 Creswell, NC

$.20 / bushel basis improvement from October to February. High year of $.50 improvement.

Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul $1.75

$1.80

$1.85

$1.90

$1.95

$2.00

$2.05

$2.10

'98-'07 Monthly Average Corn PriceHarvest Low Price

Month

Corn

Pric

e

$.16 per bushel average seasonal carry in the corn market.

USDA 98-07 Average Monthly Corn Price

Grain Storage Returns

» Storage Investment -- $3.50 / bushel˃ Income Improvement (Basis) – Oct. to March -- $.20 per bushel˃ Income Improvement (Market Carry) -- $.16 per bushel˃ Income Improvement (Commercial Charges) -- $.20 per bushel˃ Operating Cost – Interest --($.15) per bushel˃ Operating Cost – Facility Operation --($.15) per bushel

+Net Return $’s / Bushel --($.26) per bushel

+7.5% Return on Investment

Grain Storage Considerations

» New or Used» New Considerations

˃ Location – proximity to Utilities˃ Improved or 80,000 pound road˃ How to elevate – mobile auger or grain leg˃ Drying system – independent dryer vs. in bin drying˃ Necessary CFM – ¼ to 1 CFM per bushel depending on region and purpose˃ Unloading and loading capacity˃ Cost - $2.50 / bushel to $4.00 / bushel depending on region, crop, and

capacity.

» If Used Storage – Cost, condition, sufficient CFM, size, Location & drying capacity

+ Used cost -- $0 to $2.50 per bushel

Storage Design

Questions?