ROI on Drainage Tile - Part 1

Introduction (Recording 12/31) (Airing 1/10)

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What’s Working in AG

BW Fusion – Brody Benton1 – What did you see working well for growers in 2021?CornBeansArea Specific?2 – What didn’t work well?3 – What should our listeners be thinking about this time of year?

Our #1 most requested topic – The field tile exploration (Does it always pay?)

We will see how this goes as it might become a multi-part episode

There are more than six million acres of cropland in Iowa where wetness limits productivity. Slightly more than half of the 375 different soils series mapped in Iowa have problems with excess water. The drainage of farmland is obviously important for improving the productivity of Iowa agriculture. Based on the large number of acres susceptible to excessive wetness and the yield response from removing this wetness, farmers and landowners are becoming increasingly interested in drainage. AND that’s just Iowa……..!

The two major methods of farmland drainage are surface drainage where standing water is removed using surface ditches and subsurface drainage where excess water is removed through a system of underground drainage tiles – that is what we are going to focus on

Joel Hayes – He and his brother run Hayes Bros Drainage in Grundy County Iowa and have been in business since 2009.  They have covered most of the state of Iowa during their time in business.Their dad/family also farms around 3500 acresJoel Lange - @centraliowa_rainage  - Joel and his family own and operate Central Iowa Drainage in Guthrie County Iowa where they have been farming since 2012.Joel’s family moved their entire farm from O-Neill Nebraska to Iowa in 2012

General Questions

What is drainage tile?Drain tile is a system of pipes with perforations or holes that channels water away from intended areasField tile is tubing or pipe buried in the ground to convey subsurface water to an outlet such as a stream or ditchWhat are outlets?The structures used to control the minimum elevation at which water leaves the drainage tile, which in turn controls the maximum elevation of the groundwater table in the area drained by the tile system to which the outlet control structure is attached.What are inlets?Purpose: A common practice that is used to. drain farmed depressions is a tile riser, which is essentially a pipe that acts as a direct conduit for water from the field to the receiving ditch or stream. A blind inlet or French drain is used to filter at least sediment from the water that is drained from the field.Why do we install drainage tile?The purpose of subsurface drainage is to lower the water table in the soil. The water table is the level at which the soil is entirely saturated with water.  The excess water must be removed to a level below the ground surface where it will not interfere with plant root growth and development. The major reason for installing subsurface drainage is to improve the productivity of the farmland.  Higher yields translate into more returns. This is especially true in recent years due to higher grain prices. So the investment decision is based on whether the higher crop returns will justify the investment in subsurface drainage.Types of tilePerforatedSolidComes with socksHow long is tile good for?When does it need replaced?Useful life of clay tileWhen was plastic first installedIs that plastic technology improved for today?Is there a right time to install tile?Always….Is there a wrong time to install tile?Reasons to tile when inputs are highWe want to put tile in….how do we get started?Prepare a planContact the USDA for approval – starts at the FSA officeWhat are recommended best practice steps to take?Mistakes to avoid?If it’s hard to expand your farm by buying high priced ground or renting more ground, how can tile help improve your bottom line?Tiling for a tax deductions…..does this work?Better than equipment purchases?Any specific tile tax breaks?Figuring out return on investment on tileCan you believe the information coming from tile guys? – Do they just want to sell more tile?Are there other resources to use? ISU Ag Decision MakerThe most difficult part of computing a tile investment analysis is estimating the yield response from the improved drainage. The size of the expected yield improvement dramatically impacts the economic feasibility of installing tile drainage, as shown in the example below.Example:
A 10 bushel per acre yield response from corn and a 4 bushel per acre yield response from soybeans will provide an average annual return of $35 for corn at a price of $3.50 price ($3.50 x 10 bu. = $35) and $36 for soybeans at a price of $9 ($9 x 4 bu. = $36). If the yield responses are 20 bushels for corn and 8 bushels for soybeans, the returns are double.Estimating future returns
In the analysis above we assumed that the annual income stream will stay constant throughout the entire life of the tile. However, this may not be the case. Corn and soybean yields have increased over recent decades as shown in Figure 3. Corn yields have increased by 2.4 percent and soybean yields by 1.8 percent per year since 1980. Most experts expect this trend to continue, if not increase. The impact of trend yield increases over the life of the tile drainage can be substantial.Tile Investment StrategiesA variety of investment strategies have emerged for the installation of tile drainage.  Some of these are based on installations over a period of time.  Others are investment arrangements between tenants and landlords on rented land.1)  Install subsurface drainage on the entire field With this strategy, the decision is made to install drainage tile on the entire field or farm.  Bids and designs are obtained from various tilers, and the decision is made to move forward with tiling the entire field or farm. 2)  Design the entire drainage system but install over a period of years – This is similar to the strategy above in that the drainage system for the entire field or farm is designed up-front.  However, the actual investment and installation of tile drainage is spread over a period of years, often as income becomes available.3)  Invest a fixed amount of money in drainage With this strategy, the investment decision is based on spending a fixed amount of money on drainage.  The system is then designed to get the most drainage benefit from the limited amount of money.  Although this may optimize the benefit from the investment, it often leads to a “patchwork” system as subsequent investments are made over a period of years and does not provide for the best overall drainage system.Landlord/tenant strategies 1)  Landlord Investment Strategy – The traditional landlord/tenant investment strategy is for the landlord to make the tiling investment and charge the tenant a higher cash rental rate.  The higher cash rental rate is due to higher yields achieved from the drainage and provides the landlord with a return on his/her tiling investment.The additional cash rent can be computed from the estimated increase in net return from tile installation. For example, if the cash rental rate is currently based on the typical rate in the local community, the new rate will be the typical rate plus the additional net return from the estimated increase in net returns from drainage.The additional cash rent can be computed based on a fixed rate of return from the tile investment.  For example, if the tiling investment is $500 per acre and a rate of return of 8 percent is desired, the additional cash rent is $40 per acre ($500 x 8% = $40).  If the cash rental rate is currently based on the typical rate in the local community, the new rate will reflect this typical rate plus $40.2)  Tenant Investment Strategy – The tenant makes the tile investment on the landlord’s farm. Because the landlord makes none of the investment, the cash rental rate does not increase due to the increase in productivity. The additional net returns go to the tenant as compensation for the tiling investment. A major concern for the tenant is whether he/she will have access to the land for a long enough period of time to justify the capital investment. One approach is to enter into a long-term lease between the two parties. However, individuals often do not want to lock themselves into a lease for this length of time.  In Iowa, farm leases of five or more years in length must be recorded and multiple-year leases may not exceed 20 years.Another option is to continue with one year leases but execute an ancillary contract dealing specifically with the tiling. Under this contract the tenant receives a pro-rata buyout of the tiling investment from the landowner if he/she ceases to rent the farm during the lifetime of the tile.For example, assume the tiling investment is $400 per acre and the life of the investment is 20 years. If the tenant ceases to rent the land after five years, he/she receives a payment of $300 per acre. Leaving after 15 years results in a payment of $100 per acre and after 20 years there is no payment.The length of the buyout period is negotiable between tenant and landlord. The buyout payment can be made by the landlord. An alternative is for the new tenant to make the buyout payment to the tenant that is leaving and take over the remaining life of the contract.3)  Shared Investment Strategy – The landlord and tenant share the tiling investment and use a crop-share lease. The investment is shared in the same proportion as the crop is shared in the leasing arrangement (e.g. 50/50). With this arrangement, each party receives the additional net returns in the same proportion as the investment. An arrangement is made where the tenant will receive a prorated buyout if he/she leaves the farm before the useful life of the tile is expended. An alternative is for the landlord to make the investment and modify the crop share lease provisions to reflect the change in contribution.Cost share programs?Tied in with bio-reactors?Payment plans?

 

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