Are you part of a tenant-landowner tandem which is till trying to determine a fair cash rent for the 2008 crop year? Take comfort in the fact you are not the only one, and the definition of “fair” is going to cause many rent negotiations to be protracted well toward the arrival of spring. The secret is keep all options open and look for creative ways to achieve the goal for both sides. And we’ll offer a few ideas that might be worthy of consideration.

If a tenant and landowner have totally ruled out a crop share lease that establishes a percentage of income and expenses for both sides, the next alternative is a cash rent lease. It is simple by the fact the operator knows exactly what the financial obligation is and it is simple for the landowner who may have no interest in keeping expense records in return for sharing in the commodity income. But structuring the lease and establishing the rental rate are challenging. Iowa State economists Don Hofstrand and Bill Edwards have offered some suggestions in the November issue of the Ag Decision Maker.

A whole farm rental rate will probably be less than the cash rent for only the tillable acreage on the farm. Sometimes there is a benefit to separating the cropland from other parts of the farm, such as a stand of timber, the improvements, and any ponds or wetlands that can’t be tilled. Separate fees for use of the non tillable land can be negotiated and added to the lease, but the major negotiations will probably address the tillable acreage.

1) Rental rates in the neighborhood. If you know what other rates are, that may be a guide to your farm. However, it assumes those other rates are fair and equitable, and there is no guarantee they are unless you know if the rate was reached with great thought and consideration. That neighbor’s cash rent rate may not be appropriate for your farm, if there are differences in production capacity. The average of the neighborhood may be more valuable than just one comparison. Some cash rents cannot be verified, even though there are plenty of coffee shop rumors. But the rumor mill is sometimes wrong. Landowners with minimal knowledge of the productive capacity of the farm may benefit from production records if they are available.

2) Average yields. The farm’s productive capacity can be determined by yield averages, using either a 5 or 10 year period. Knowing the county’s typical rental rate in terms of dollars per bushel of corn or beans allows a per acre calculation that is based on the ability of the farm to produce grain. And use the longer term statistics without the temptation to discard either high or low yield years.

3) Corn suitability rating. The CSR is another productivity index that assigns higher numbers to better soils since they produce higher yields. Yields that establish the zero to 100 index can be converted with the use of a multiplier to dollars per acre.

4) Share of gross crop value. Most cash rents parallel the value of crops produced on the farm and a determinant such as the county loan rate and USDA program payments for the farm can be used to calculate a cash rent. Edwards and Hofstrand say, “Rents have generally averaged about 35 to 40 percent of gross crop value from corn and 45 to 50 percent of gross crop value from soybeans. These percentages and estimated yields and prices for the coming year can be used to estimate a fair cash rental rate.”

5) Return on investment. Landowners who compare their farmland to other investments will frequently calculate the return, and the Iowa State economists say surveys have indicated good farmland cash rents have averaged 5-6% of current land values. So $3,000 land with a 5% return would cash rent for $150 per acre. Most Extension agents, local tax officials, and auctioneers can help with an estimate of your local land values.

6) Comparison with crop share lease income. While it may take time to calculate the expected income from a crop share lease, it may be a productive exercise to show a land owner what the income might have been under that arrangement. It might be a starting point or an ending point in the discussion, but it could help shorten the negotiations.

7) Tenant’s residual. You’ve heard the old income tax joke that directed a farmer to calculate his profits for the year and send a check to the IRS for that amount. This is a serious, but parallel approach to a calculation. It is valuable for the tenant to know how much can be legitimately dedicated to land cost by determining the availability of funds after production costs are paid. Once total farm income is estimated, deduct production costs, machinery expenses, depreciation, insurance and the tenant’s return to labor and management. The remaining balance is available for paying a cash rental rate.

While those alternatives may be possibilities to solve your stalemate over cash rent, keep in mind that none of them take yield and price risk into consideration. Cash rent tenants assume those risks, and to manage those risks, the rental rate may need to reflect the added risk. Edwards and Hofstrand suggest doing that with conservative estimates of the yield and sale prices, or ratcheting down the rental rate.

Summary:
A wide variety of methods can be used to determine a fair cash rent. They include what others are charging/paying, average yields, corn suitability ratings (CSR index), share of gross crop value, return on investment, crop share equivalent, and tenant’s residual. Whatever method is selected, the operator should have a cushion for yield and price risk variations.