Is Your Land Rent Plan as Good as it Could Be?12/19/2017
With another production year starting, it’s a good time to evaluate one of the biggest financial costs for most producers: land rent.
Nearly 40 percent of the 911 million acres farmed in the contiguous U.S. is rented, according to 2012 Census of Agriculture data from USDA’s Economic Research Service. In some areas, farmland rental is even higher—60 percent in Illinois, 53.4 percent in Indiana and 53 percent in Iowa.
That means there’s a good chance you rent or lease your crop acreage or pastureland from a landlord. Is your land-rent arrangement as good as it could be? As you consider 2018’s budget and rental arrangements, keep the following four tips in mind.
1. Know your numbers. The more knowledge you have about your actual per-acre costs and revenue, the less likely you are to make a bad rental-rate decision. Know your predicted seed, chemical and fertilizer costs for 2018. Be aware of what you normally spend per acre for these as well as other variable per-acre costs such as fuel and crop insurance. Know your per-acre overheard. Don’t forget to include any debt service or family living that each acre must account for. If you have a good grasp on what a rented farm is returning in revenue as well as all per-acre costs, you can now calculate options.
2. Check out a few of the fair or equitable farm-rent calculators out there. A quick Google search shows most land-grant universities have a free tool to calculate equitable rent. I encourage you to research and find a calculator that works for you. Keep in mind that what you believe is fair and what a landlord deems fair are likely to be very different. That’s where negotiation comes into play. Organize your thoughts and options before beginning this process. Also, if the current situation calculates to be unprofitable, keep this in mind: Before letting land go, you need to understand what happens to your overhead. If you decrease unproductive acres, the overhead that those acres were covering will now spread across fewer acres and will raise the cost on your other land. Be sure to understand the whole farm impact, not just the one rental arrangement.
3. Be aware of alternative rental arrangements. There are many options to choose from, such as cash rent, crop share, flex rent with a cash bonus, fixed bushel rent and flex leases, just to name a few. Just as with fair-rent calculators, most universities also have a rental-arrangement comparison calculator. I suggest choosing one that fits your area and doing some analysis. Don’t spend too much time determining which rent calculator to use or even running different scenarios. Instead, focus on knowing the impacts of each option and how they affect your cash flow. There is a lot of guesswork when it comes to price and yield, so don’t overthink it.
4. Tell your story to the landlord and be sure to communicate it in a way he or she understands. Today, many landlords are a generation or two removed from agriculture. In fact, most rented acres are owned by non-operator landlords. So, they may not see things from your perspective. In addition to sharing the economics, be prepared to let your landlord know about your strong points, such as agronomic and environmental strengths. Share how you will communicate what is going on with their land. Explain how your stewardship and communication will make their investment better and more enjoyable.
Editor’s note: Dennis Roddy is a Midwest-based agricultural consultant with K·Coe Isom. With more than two decades of experience in ag lending and farm management, as well as real-world farming and ranching experience, he is uniquely qualified to help farmers and ranchers operate profitably. Contact him at email@example.com.
Source: High Plains/Midwest Ag Journal