farmgate: How Much And What Kind Of Cash Rent Will You Be Willing To Pay To Keep Your Current Operation?
While the market has to compete for corn, beans, and wheat by bidding up prices, farm operators see themselves in the driver’s seat. But many farm operators may soon find themselves having to compete for land next year by bidding up cash rent. When big money is involved, families and longtime friendships can sometimes give way to cut-throat business practices.
For 30 years Howard Doster was a farm management specialist at Purdue, and now retired, he coaches land owners and operators. His recent “think piece.” What's Your Right Rent For '08? suggests that land owners are really the ones in the driver’s seat and cash renting operators may need to pay a bit more attention to the landowner in the current market, “If you’re the tenant, you face the risk of someone out-bidding you. I predict more tenants will lose their leases for ‘08 than at any time since the early seventies when crop prices also increased faster than non-land costs. Most of these turnovers could be avoided if only present tenants would do something nice for their owners. Perhaps tenants will want to check with their local FSA administrator to see if they can revise their ‘07 leases up until the end of August.”
Keeping Doster’s comments in mind, anyone who depends on leased farmland to make a living should consider creative opportunities for leases. Many landowners who are older or have minimal farming expertise probably are not interested in the obligations of a crop share lease. Their priorities are cash renting their land and some will put land up for rent auctions. Other landowners who appreciate the value of a good operator may be open to creative leases that provide a high return to their land investment. One of the more creative lease concepts comes from Farm Management Specialist Gary Schnitkey and Ag Economist Dale Lattz, both of the University of Illinois. Their proposal is “Flexible Cash Leases Based On Crop Insurance Parameters.”
It is the goal of both the land owner and the operator to maximize their income, and a fair lease will do that, but finding a fair lease in times of volatile commodity prices is a challenges. The Schnitkey/Lattz concept “bases its payments on parameters used in setting revenue guarantees on Group Risk Income Plan (GRIP) crop insurance policies. As structured, this flexible lease causes landlords and farmers to share in commodity price changes that occur between years.” With the explosive popularity of the GRIP crop insurance policies, this lease will be one that most operators will appreciate, and its simplicity of formula will be appreciated by the land owner.
In its simplest form, the payment mechanism based on corn is: Expected county corn yield x base corn price x rent factor.
1. The expected county yield is set annually by USDA, based on trend yields for the county.
2. The base price is computed by USDA at the beginning of March for crop revenue insurance policies such as CRC and RA. It is determined by the performance of the DEC corn contract during the month of February.
3. The rent factor is a percentage negotiated annually between the landlord and farmer depending upon productivity of the land and risk to the operator. Farms with lower productivity relative to the county average should have lower rent factors and vice versa.
The primary advantages to this lease are that it reflects the changes in commodity prices and the level of cash rent to be paid will be determined about March 1, which allows operators to use crop insurance and hedges to manage the risk of the cash rent payment. Crop yield history is not needed, and since USA would recognize this as a cash lease, any farm program payments would go to the operator.
The disadvantages are that yield and price risk are still on the shoulders of the operator and it only adjusts for price changes between production years. The rent factor will still need to be a point of negotiation and as costs and risks increase for the operator, the rent factor needs to be adjusted down. Some may also see March 1 as a late date for a cash rental rate to be determined.
Schnitkey and Lattz make several suggestions that may facilitate the rent calculation and negotiations with the land owner. Minimum and maximum cash rents can still be established; all crops can be used to establish the formula, not just corn; and rents can be based on harvest prices instead of the spring guarantees from the crop insurance calculation.
Summary:
Cash rent calculations are always difficult to determine, since the land owner says it is too little, and the operator says it is too much. Utilizing a cash rent calculation formula that is based on crop insurance and market prices will allow an operator to use crop insurance and hedging to manage the risk of the cash rent. At the same time, it allows a land owner to receive a fair rent, based on commodity market values. Such a concept may be needed by many landowners in an effort to retain their cash rented land from would-be renters.
Posted by Stu Ellis on August 23, 2007 12:19 AM to farmgate