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Farm Leasing Arrangements

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Title: Farm Leasing Arrangements


1
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2
Farm Leasing Arrangements
Tim Eggers Field Agricultural Economist
teggers_at_iastate.edu 712-542-5171 www.extension.ia
state.edu/feci
3
Agenda
  • What Prices are Relevant?
  • Trends in Farmland Values
  • Farmland Leasing Practices
  • DCP vs. ACRE
  • Determining a "Fair" Cash Rental Rate
  • Flexible Cash Leases
  • Beginning Farmer Tax Credit
  • General Farm Economy
  • Who Pays Property Taxes

4
Tools
  • ISU Extension Staff Resources
  • Ag Decision Maker
  • Decision Aids
  • Annual Surveys
  • Publications
  • Decision Tools
  • Agricultural Management e-School
  • Farm Leasing Arrangements course
  • Non ISUE resources
  • SoilView
  • WebSoilSurvey

5
www.extension.iastate.edu/agdm
6
Hazards for 2010
  • Interest rate increases
  • Asset value declines
  • Below break-even crop insurance prices
  • Missing the 2009 ACRE boat
  • Missing the 2008 SURE boat

7
Power Mach Cost vs Invest. Cost(Per Acre)
Low 96
Mid 76
High 72
8
Direct Corn Expenses
9
Direct Bean Expenses
10
2010 Crop Cost Estimates - Corn Following Soybeans
Low Yield
Medium Yield
High Yield
Average Yield
4.25/bu
4.11/bu
4.01/bu
Cost per bushel
11
2010 Crop Cost Estimates - Soybeans Following Corn
Low Yield
Medium Yield
High Yield
Average Yield
9.97/bu
9.73/bu
9.55/bu
Cost per bushel
12
2010 Break Even Costs by Crop Rotation Yield
13
December 2009 Corn Futures2009 Rental Rate
Decision Time
14
December 2010 Corn FuturesSummer 2009
15
Corn Futures(dont forget the 50 cent basis)
6.40 Dec 09 (August 2008)
3.68 Dec 10 (August 2009)
3.20 Dec 09 (August 2009)
16
November 2009 Soybeans2009 Rental Rate Decision
Time
17
November 2010 SoybeansSummer 2009
18
Soybean Futures(dont forget the 90 cent basis)
13.40 Nov 09 (August 2008)
10.91 Nov 09 (August 2009)
9.30 Nov 10 (August 2009)
19
4.11
3.20
9.73
8.29
www.ufmcoop.com
20
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23 fewer operational plants
April 24, 2008 July 23, 2008 December 16, 2008 February 13, 2009 May 1, 2009
Not Producing 10 11 19 36 38
On Hold 24 33 48 48
Operational 168 186 182 165 163
Planned 320 241 224 221 217
Under Construction 73 63 46 19 21
Cancelled 17 19 18
22
Iowa Farmland Value Surveys
  • Iowa State University Extension
  • conducted annually around November 1st
  • mailed survey sent to 1,100 licensed real estate
    brokers
  • usually 500-600 responses
  • released in mid-December
  • Federal Reserve Bank of Chicago
  • quarterly survey of ag lenders by state
  • http//www.chicagofed.org/economic_research_and_da
    ta/ag_letter.cfm
  • Realtors Land Institute
  • semi-annual survey (March and September)
  • compares land classification by corn production
  • includes pasture and timber land
  • http//www.centralstatesland.com/csmlsdisplay.asp?
    ided01

23
Federal Reserve Bank of Chicago
  • 2 increase April 2008 to April 2009
  • 7 decrease January 2009 to April 2009

24
Iowa Farm Land Chapter 2Realtors Land
Institute
25
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26
Iowa State University ExtensionLand Value Survey
  • November 2008
  • November 1, 2007 to November 1, 2008

27
Southwest 3,626 Up 13.0 Up 416
High 4,642 Medium 3,425 Low 2,298
28
Average Values All Grades 1950-2008
29
Percentage Change from Previous Year, 1951-2008
30
Percentage Change Adjusted for Inflation, 2008
Dollars
11, 13, 10 1979, 1980, 1981
31
Who Purchased Farmland
32
2008 Land Value Increases
14.1 to 16
up to 12
16.1 or more
12.1 to 14
33
Positive Factors Affecting Land Values
34
Negative Factors Affecting Land Values
35
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.29
.18
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39
Crop Share 50-50 Lease
Landlord
Tenant
Labor ½ inputs Machinery Management
Land ½ inputs
½ income
½ income
40
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41
Crop Share 50-50 Lease Corn
Landlord
Tenant
Land 139 ½ inputs 164
Labor 29 ½ inputs 164 Machinery
66 Management 43
½ income 303
½ income 303
42
Crop Share 50-50 Lease Soybeans
Landlord
Tenant
Land 99 ½ inputs 108
Labor 28 ½ inputs 108 Machinery
47 Management 24
½ income 207
½ income 207
43
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45
or How the Other 10 Live
46
Putting a Lease Together
  • Determine the goals for each party
  • production with the highest potential return
  • fair return to each party
  • continuity of income year to year
  • minimize risk
  • improve communication skills
  • Put the agreement in writing -
  • Both parties should be accountable to the lease
    arrangements established

47
Improving Negotiation Skills
  • Focus on win-win situations
  • Introduce funny money
  • Dont underestimate your position at the
    bargaining table
  • Formulate a resistance point

48
The New Farm Program
  • DCP same as before, Except
  • 2009-2012
  • 83.3 instead of 85
  • Payment limitations
  • Attribution
  • The ACRE option

49
ACRE Decision Points
  • Choices
  • Stay with current program
  • Enroll in ACRE in 2009 (August 14 deadline)
  • Enroll in ACRE in a later year

50
ACRE Option
  • 1-4 years,
  • from enrollment to end of program
  • Once the farm is in ACRE, it stays in
  • until the program ends in 2012
  • Landowner and tenant must sign
  • If the tenant changes it stays in ACRE
  • If the land sells it stays in ACRE

51
ACRE characteristics
  • Based on loss of revenue (price x yield)
  • Benefits calculated state-wide (trigger 1)
  • State guarantee is recalculated each year
  • It cant change by more than 10 each year
  • Must have revenue loss on farm (trigger 2)

52
ACRE vs. CCP Corn
No ACRE payments
ACRE pays out
CCP pays
No CCP payments
53
ACRE vs. CCP Soybeans
No ACRE payments
ACRE pays out
CCP pays
No CCP payments
54
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55
Determining A Fair Cash Rent Value
56
Leasing Opportunity
Soil Type Acres Percent CSR ----------
-------- -------- ----- T370B 61.47
23.2 85 248 17.72 6.7
60 T368 16.70 6.3 90 212
11.71 4.4 91 T369 87.78
33.1 85 133 9.69 3.7
80 220 60.11 22.7 85 ----------
-------- -------- ----- Totals
265.19 100.0 83.73 Iowa Corn Suitability
Rating based yield estimation 179 bushels per
acre
57
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58
Supporting Information
Location Page County Tillable Acres 265
Acres Corn Yield 179 bu/Acre Soybean
Yield 49 bu/A Corn Suitability Rating 84 CSR
59
Calculating Cash Rent Values
Cash Rent Market Approach ISU Extension
Publication FM 1851 Cash Rental Rates for Iowa
2008 Survey (released in June) Three Methods for
Determining Cash Rent Values Typical Cash
Rent Average Rent for Production Average Rent for
Corn Suitability Rating (CSR)
60
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Calculating Cash Rent
  • Typical Cash Rent
  • Select the Area of the State/County
  • Area 10 County Page
  • Determine Overall average 159
  • High Quality Third 184
  • Middle Quality Third 159
  • Low Quality Third 135

62
Calculating Cash Rent
2 a. Average Rents Per Unit Corn Yield Select
the Area of the State/County Determine Average
Rent for Corn Farms Average Corn Yield (bu/A)
179 Times rent per bushel of Corn yield
1.05 Equals the Average Rent for Corn
Acre 188
63
Calculating Cash Rent
2 b. Average Rents Per Unit Soybean
Yield Select the Area of the State/County Determ
ine Average Rent for Soybeans Farms Average
Soybean Yield (bu/A) 49 Times rent per
bushel of Soybean yield 3.39 Equals the
Average Rent for Soybean Acres 166
64
Calculating Cash Rent
  • Average Rents Per Unit Corn Soybeans
  • Add the Average Rent for Both
  • Corn Average Rent 188
  • Soybean Average Rent 166
  • Average Rent Corn Soybeans 177

65
Using Corn Suitability Rating (CSR)
  • Average Rents Per CSR Index Point
  • Select the Area of the State/County
  • Determine the Average Cash Rent using CSR
  • Farms Average Corn Suitability Rating 84
  • Times rent per CSR index point 2.16
  • Equals the Average Rent for all Row Crop Acres
    181

Source ISU Extension Publication FM- 1851
66
Overall Average
Average all 3 Methods Method 1 Typical Cash
Rent 184 Method 2 Average Rents per
Unit 171 Method 3 Average Rents per CSR
Index Point 181 Average 181
/A 181/A X 265 Tillable Acres 47,965 Split
Payments of 23,983 and 23,982
Source ISU Extension Publication FM- 1851
67
Cash Lease Calculations
Gross Income Method Tenant Residual Method Crop
Share Method Return on Investment Method
68
Assumptions
  • 265 crop acres
  • 179 bushel corn yield
  • 49 bushel Soybean yield
  • Direct Government Payments
  • 2002-07 average 22.00 / acre
  • DCP change is 83.3 instead of 85 (0.45 less)
  • ACRE change is 20 less (4.75 less)
  • plus the 0-159 ACRE payment if triggers are
    tripped

69
Share of Gross Income
CORN (179 bu X 3.20) 22 595 SOYBEANS
(49 bu X 8.29) 22 428
Iowa cash rents typically are equal to about 30
to 40 percent of the gross income from producing
corn, and 35 to 45 percent of the gross income
from producing soybeans.
Cash Rental Rate CORN 595/ac x 35
208 SOYBEANS 428/ac x 40
171 Average 190
70
Tenant Residual Method
CORN 595 - 445 149 SOYBEAN 428 -
304 124 Average 137
71
Crop Share Method 50-50 Share
Corn 50 of gross minus owners costs 297 -
165 132
Soybeans 50 of gross minus owners costs 214
- 108 106
Average 119
  • The owner is assumed to pay 50 percent of the
    costs for seed, fertilizer, lime,
  • pesticides, crop insurance, interest and
    miscellaneous, and drying and storage.

72
Expected Rent (3.8) X 4,500 / acre
171 / acre
73
Corn Soybeans
Cash Rent Survey Per Bushel Yield Per CSR
Point Gross Income Tenant Residual Crop
Share Return on Investment Average
184 184 188 166 181 181 208 171 149
124 132 106 171 171 173 158
July 2009 165 --- 30 decrease July 2008
237 --- 27 increase July 2007
186 --- 43 increase July 2006 130
74
61 CSR 164 Corn 45 Beans
Crop Share 98.46 Tenants Residual 94.81
75
58 CSR 160 Corn 44 Beans
Crop Share 84.46 Tenants Residual 93.23
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49 CSR 137 Corn 34 Beans
Crop Share 54.74 Tenants Residual 7.38
78
Flexible Cash Leases
  • Desire
  • Terminated tenants want cash rent leases to be
    renewed by September 1 for the following year
  • Current Reality
  • Prices and yields are very unpredictable
  • Solution
  • Flexible lease contract

79
Advantages Disadvantages
  • Owner and producer share in risks
  • Not as well understood as traditional cash lease
    or crop share
  • More difficult to calculate
  • Owner benefits from tenants management skills
  • Tenant loses windfall profit potential from high
    prices
  • Price and production risk shared as well as
    profit opportunities
  • Actual rent adjusts as production or price change
  • Owner does not have to be involved in decision
    making about inputs or marketing

80
Types of Flexible Cash Leases
  • Rent varies with both price and yield
  • Matches tenants ability to pay
  • Rent varies with yield only
  • Could have high yields, low prices
  • Rent varies with price, only
  • Could have low yields, high prices

81
A Flexible Cash Lease is a Cash Lease
  • lt April 2007
  • cash lease, crop share lease, or scheme or
    device
  • April 2007 December 2008
  • Either a cash or a crop share lease
  • gt December 2008
  • Flexible cash leases are recognized as cash
    leases in federal register clarification of FCE
    2008

82
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84
Agricultural Asset Transfer Tax Credit
Iowa Agricultural Development Authority 505 5th
Avenue, Suite 327 Des Moines, Iowa
50309-2322 Ph 515-281-6444 Fax
515-281-8618 Email iada_at_iowa.gov A Division of
the Treasurer of the State of Iowa
85
State Income Tax Credits
  • Non refundable
  • Can carry unused credits forward 5 years
  • No carry back

86
What Is An AgAsset?
  • Agricultural land
  • Agricultural improvements
  • Depreciable agricultural property
  • Breeding livestock
  • Machinery/Equipment
  • Does not have to be traditional cow plows.

87
Key ProvisionsTaxpayer
  • Owner of record of the asset
  • Eligible to own land under corporate farming laws
  • Not at fault for terminating a prior lease
  • Not a party to pending administrative or judicial
    action relating to violation of CAFOs
  • Not classified a habitual violator by DNR
  • Can have more than 1 tax credit/lessee
  • At fault termination, repay redeemed credits

88
Key ProvisionsBeginning Farmer
  • Net worth less than 300,000
  • Have sufficient education, training and/or
    knowledge
  • Have access to working capital
  • Actively participate in management and labor of
    the operation and assume financial risk
  • 18 years or older

89
Other Provisions
  • Two Five Year Lease Term
  • Credit Good For Term of Lease
  • Renewable at Expiration(with qualification)
  • 5 of Gross Income Cash Contract
  • 15 of Gross Income Commodity Share Agreement
  • Lease value not substantially higher/lower than
    market

90
Other Provisions
  • Began with 2007 tax year
  • Cash or Crop Share Leases
  • Related party transactions OK
  • Cant rent from owned entity
  • Rent to own is not eligible

91
Other Provisions
  • Leases Can Be Non-Traditional (if reasonable)
  • Crop Share
  • Income determined by county average
  • Monthly average of county posted price
  • No Yield Monitors
  • Submit FSA Form 156
  • Documents Acres Ownership

92
Application/Approval Procedures
  • Obtain application from IADA
  • Taxpayer application
  • Beginning farmer application
  • Submit applications copy of lease to IADA
  • Applications due 15th of month
  • Considered _at_ board mtg. (4th Wednesday)

93
For Additional Information
  • IOWA AGRICULTURAL
  • DEVELOPMENT AUTHORITY
  • 505 5TH Ave., Suite 327
  • Des Moines, IA 50309
  • 515/281-6444
  • iada_at_iowa.gov
  • www.iada.state.ia.us

94
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What the Records Show
  • Make sure the data
  • doesnt get in the way
  • of seeing the problem.

96
FINBIN Key Ratios
Definition
Liquidity Current Ratio Ability to pay todays bills
Liquidity Working Cap to Gross Available dollars to total revenue
Solvency Debt to Asset Ratio Owed vs Owned
Profitability (cost) ROA Return on all assets
Profitability (cost) ROE Return on net worth
Repayment Term Debt Coverage Ability to pay notes this year
Efficiency Oper Expense Ratio of total revenue used for operations
97
By Net Farm Income 2008, Minnesota
Crop Farms Low 20 Crop Farms High 20
Liquidity Current Ratio 1.39 2.50
Liquidity Working Cap to Gross 22 51
Solvency Debt to Asset Ratio 52 43
Profitability (cost) ROA 1 18
Profitability (cost) ROE -6 26
Repayment Term Debt Coverage 0.9 4.7
Efficiency Oper Expense Ratio 81 59
98
By Age, Minnesota, 2008
Crop Farms lt31 Yr Old Crop Farms 51-60 Yr Old
Liquidity Current Ratio 1.66 2.06
Liquidity Working Cap to Gross 26 43
Solvency Debt to Asset Ratio 64 43
Profitability (cost) ROA 15 12
Profitability (cost) ROE 27 17
Repayment Term Debt Coverage 3.2 3.0
Efficiency Oper Expense Ratio 68 64
99
By Crop Acres, Minnesota, 2008
Crop Farms 251 1,000 A Crop Farms gt 2,000 A
Liquidity Current Ratio 2.02 1.95
Liquidity Working Cap to Gross 40 40
Solvency Debt to Asset Ratio 45 48
Profitability (cost) ROA 12 15
Profitability (cost) ROE 18 23
Repayment Term Debt Coverage 2.9 3.8
Efficiency Oper Expense Ratio 62 65
100
FINBIN Key Ratiosby Crop Acres, 2008, Minnesota
Hog Farms lt 100 Acres Hog Farms gt100 Acres
Liquidity Current Ratio 0.96 1.67
Liquidity Working Cap to Gross -1 19
Solvency Debt to Asset Ratio 71 53
Profitability (cost) ROA -13 1
Profitability (cost) ROE -62 -4
Repayment Term Debt Coverage -2.3 0.6
Efficiency Oper Expense Ratio 105 93
101
By Crop Acres, Minnesota
Hog Farms lt 100 Acres 2008 Hog Farms lt100 Acres 2006
Liquidity Current Ratio 0.96 1.77
Liquidity Working Cap to Gross -1 14
Solvency Debt to Asset Ratio 71 50
Profitability (cost) ROA -13 15
Profitability (cost) ROE -62 24
Repayment Term Debt Coverage -2.3 2.2
Efficiency Oper Expense Ratio 105 87
102
By Crop Acres, 2008, Minnesota
Dairy Farms lt 100 Acres Dairy Farms gt 100 Acres
Liquidity Current Ratio 1.36 1.82
Liquidity Working Cap to Gross 5 14
Solvency Debt to Asset Ratio 52 47
Profitability (cost) ROA 12 8
Profitability (cost) ROE 21 11
Repayment Term Debt Coverage 1.9 1.7
Efficiency Oper Expense Ratio 80 76
103
By Gross Farm Income, 2008, Minnesota
Beef Farms lt 500,000 Beef Farms gt 500,000
Liquidity Current Ratio 1.78 1.50
Liquidity Working Cap to Gross 39 27
Solvency Debt to Asset Ratio 42 53
Profitability (cost) ROA 2 9
Profitability (cost) ROE -2 13
Repayment Term Debt Coverage 1.1 2.4
Efficiency Oper Expense Ratio 76 76
104
Iowa Property Taxes
  • The Iowa property tax is primarily a tax on
    "real property," which is mostly land, buildings,
    structures, and other improvements that are
    constructed on or in the land, attached to the
    land, or placed upon a foundation. Typical
    improvements include a building, house or mobile
    home, fences, and paving.

http//www.iowa.gov/tax/educate/78573.html
105
Following Five Classes are Assessed
  • residential
  • agricultural
  • commercial
  • industrial
  • utilities/railroad This class is assessed at the
    state level.

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108
How is property tax rate determined?
  • 1. The value of property is established.
  • 2. The assessments of all taxable properties are
    added together.
  • 3. The Department examines total assessed values
    and equalizes them.
  • A process called "equalization" is applied every
    two years.
  • The "assessment limitation" or rollback is
    applied every year.
  • 4. Budgets are established.
  • 5. A tax rate is established.
  • 6. Credits are subtracted.

109
Equalization
In Step 3 above, the Iowa Department of Revenue
is responsible for "equalizing" assessments every
two years. The Department compares the
assessors abstracts to a "sales assessment ratio
study" it has completed independently of the
assessors. If the assessment (by property class)
is 5 percent or more above or below the sales
ratio study, the Department increases or
decreases the assessment. There is no sales
ratio study for agricultural and industrial
property. Equalization occurs on an entire class
of property, not on an individual property. Also,
equalization occurs on an assessing jurisdiction
basis, not on a statewide basis. Equalization is
important because it helps maintain equitable
assessments among classes of property and among
assessing jurisdictions. This contributes to a
more fair distribution of state aid, such as aid
to schools. It also helps to equally distribute
the total tax burden within the area.
110
Rollbacks
More than 20 years ago, residential property
values were rising quickly. To help cushion the
impact of high inflation, the Legislature passed
an assessment limitation law called rollback.
Increases in assessed values for residential
and agricultural property are subject to this
assessment limitation formula. If the statewide
increase in values of homes and farms exceeds 4
percent due to revaluation, their values are
"rolled back" so that the total increase
statewide is 4 percent. Rollback is also
available for industrial and commercial property
when necessary. This does not mean that the
assessment on your home will increase by only 4
percent. The rollback is applied on a class of
property, not an individual property. This means
that the statewide total taxable value can
increase by only 4 percent due to revaluation.
111
Assessment
Residential, commercial and industrial real
estate assessed at 100 percent of market
value Agricultural real estate assessed at 100
percent of productivity and net earning capacity
value. The assessor considers the productivity
and net earning capacity of the property.
Agricultural income as reflected by production,
prices, expenses, and various local conditions is
taken into account.
112
For further property tax information
  • http//www.iowa.gov/tax/locgov/proptax120707.pdf
  • www.iowa.gov/tax/taxlaw/PTC-Feb5-04.pps
  • http//www.iowa.gov/tax/locgov/PolkCoRule.pdf
  • http//www.iowa.gov/tax/educate/78573.html
  • http//www.iowa.gov/tax/locgov/iowa-property-tax.h
    tml

113
Hazards for 2008 July 2007
  • Lower crop insurance prices
  • Higher input costs
  • rent, fuel, fertilizer, seed, machinery, and
    drying
  • Yields
  • low or at insurance coverage levels
  • Price
  • average or below break even
  • Increased world supplies or low ethanol prices

114
Hazards for 2009 July 2008
  • Economic Profits Hangover
  • Lower Crop Insurance Prices
  • Farm Bill implementation
  • ACRE confusion
  • Estate and general tax issues to be addressed
    with new legislature in 2009

115
Other Resources
  • Materials from this meeting
  • http//www.extension.iastate.edu/feci/Leasing/vflm
    .html
  • Online Courses Ag Management e-School
  • http//www.extension.iastate.edu/ames
  • Workshops, meetings, conferences
  • http//dbs.extension.iastate.edu/calendar/
  • Publications rental survey, land value survey,
    etc.
  • http//www.extension.iastate.edu/pubs/
  • Articles and spreadsheets
  • http//www.extension.iastate.edu/agdm/
  • Private Consultation
  • http//www.extension.iastate.edu/ag/fsfm/fsfarmmg.
    html

116
Land Leasing Confidence
Farm Lease Arrangements
  • Introduction to Farm Leases
  • Cash Rent Leases
  • Crop Share Leases
  • Custom Farming
  • Renting Buildings
  • Renting Hay and Pasture Land
  • Legal and Tax Considerations
  • Conservation and Environmental Considerations
  • USDA Agencies and Programs
  • Owner and Operator Relations

A.M.E.S. Agricultural Management e-school An ISU
Extension Outreach Institute
117
Purchase Plan
Farmland Ownership
  • Land Value Trends
  • Using Soils Information
  • Appraisal Techniques
  • Financing Considerations
  • Feasibility of a Land Purchase

A.M.E.S. Agricultural Management e-school An ISU
Extension Outreach Institute
118
Thank You!
  • Tim Eggers
  • Field Ag Economist
  • ISU Page County Extension
  • 311 East Washington
  • Clarinda, Iowa 51632
  • (712) 542-5171teggers_at_iastate.edu
  • www.extension.iastate.edu/feci

119
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