Take Hard Look at Farmland Leases11/03/2016
Relying on family tradition isn’t necessarily the best business approach when reviewing 2017 farmland leases, as one young farmer recently learned.
Explaining that his aunt is a kind-hearted landowner who doesn’t farm, this fellow explained that better understanding farmer operating expense ratios and the differences between crop share and cash rent leases are a couple of concepts that will go far to help her negotiate a better lease and build a long-term relationship with the farmer.
He picked up on these concepts and other advice at an Illinois Extension farmland leasing workshop presented by Ruth Hambleton, who is a Southern Illinois University farm management instructor at the College of Agricultural Sciences and founder of Annie’s Project, a women’s farm business program.
“It’s going to be a rough year going through 2017, and you can see that when you look at the operating expense ratios from the past several years,” she explained. “You can easily see how farmers in the past year have burned through their working capital cash and now they’re getting into their savings. This is not good. We have to do some real tight budgeting for 2017.”
Do The Math
Operating expense ratios allow farmers to better understand their expenses against net income. Those average ratios in Illinois were 55 percent expenses in 2012 and then started rapidly increasing to 69 percent expenses in 2013, 72 percent in 2014 and 81 percent in 2015.
While most farming expenses — such as seed, fertilizer and labor — are fixed, one factor to help get expenses under better control is to renegotiate the farmland lease.
“Leasing is a big deal here, where three-fourths of farmland is leased,” Hambleton explained.
Cash leasing instead of crop share is the most popular lease arrangement, and Hambleton said this trend will continue to grow.
“But farmers right now are putting more money into rents than what they’re getting out,” she warned.
Here are some points she suggested researching for new leases:
- Negotiation is the best tool for understanding and building a professional relationship. Considering the growing competition over land leases, Hambleton urges farmers to discuss current economic conditions and consider annual rent adjustments until conditions change.
- Always work with a written lease for all parties’ protection and have the family attorney review it. This is one way to ensure no subletting occurs, and if a legal dispute arises, the document will stand up better in court than someone’s memory of a “handshake agreement.” A written lease also can address who benefits from capital improvements — such as tiling, irrigation and wells — if there’s early release from the contract, who is responsible for soil testing and other items.
- Because women outlive men, it’s also important that spouses understand the farm business and any farmland leases.
- Negotiating items could include the bonus level of gross receipts and what price is used for determining gross receipts. Hambleton suggested using spring crop insurance pricing.
- When determining base rent and the bonus, any government payments, namely Agriculture Risk Coverage revenues, must be factored into gross receipts.
- Consider less-expensive options to keep a landlord happy, such as mowing barriers or buying crop insurance covering the landlord.
- Termination letters should be sent out by Oct. 31.
“Treat your landlord like a business partner because you are in business together,” Hambleton added.
Source: Karen Binder, AgriNews