If you are a farm operator, raise your hand if you are paying more cash rent in 2008 than last year. Thank you. Now, raise your hand if you calculated the impact of the higher cash rent on your net worth. Oh, OK. Well, did you consider that higher cash rent would impact your net worth? Hmmm. That may have been a good idea, as you will see.

Cash grain farmers have become enamored with higher commodity prices. In the space of 2-3 years, the price of major crops have nearly doubled as the food and fuel industries compete for corn and soybeans, and wheat competes for its share of the acreage. But the land owner has asked for a share of the wealth, and has been receiving it in the form of higher rates of cash rent, which has also doubled for many farms. But in paying more, have farm operators hurt their net worth by paying more for land?

Yes, say a group of agricultural economists from Texas A&M University, who studied 12 representative feed grain, cotton and rice farms around the nation to quantify the impact of higher cash rental rates. Their analysis looked at the period from 2005 to 2012 and evaluated the impact of debt, Farm Bill programs, and cropping patterns on the bottom line of the operator. Cash rental rate increases of 25%, 50%, 75%, and 100% were calculated against the recent base level cash rent paid by the farm operators, then the impact on net worth was computed.

As you would expect, the greatest impact was on those farms with the greatest share of their land under cash rent leases, compared to crop share or owned land. Crop share agreements essentially insulated the owner from the adverse impact. Also, the greater impact was upon those that began the period with higher rental rates.

1) A 3,400 acre IA farm, cash renting about half of its acreage, would suffer a $385 thousand decline in net worth with a 25% increase, and a $1.7 million decline with a 100% increase in cash rent.
2) A 1,200 acre TX farm, with only a $13,000 net worth to begin, suffered the greatest loss with a minus $1 million net worth in the 100% increase category, and even a minus $213 thousand net worth if cash rents were raised only 25%.
3) A 2,200 acre IN farm which began with a $7.2 million net worth, declined to $7 million with a 25% increase in rent and a $6.3 million net worth at the 100% level increase. Approximately half of its acreage is cash rented.
4) A 3,500 acre South Carolina operation, beginning with an $8.2 million net worth, lost only $350,000 in net worth even with a 100% increase in cash rent. It owned 1,400 and cash rented 2,100.

The Texas A&M economists suggest that improved commodity markets, resulting in part from the increased demand for bio-fuels, may benefit the land owner more than the operator. They say rents have been pushed higher by owners watching the commodity markets. However, Farm Bill payment limits have restricted operator income on large operations, subsequently limiting net worth of the operator, but not of the land owner. Additionally, the increasing number of absentee land owners has bolstered the number of cash rent leases.

Summary:
The increasing popularity of cash rent leases among land owners has created an economic environment which can threaten the net worth of farm operators, who have to pay higher rental rates to acquire acreage. A study of cash grain operations shows various impacts, all of which result in a loss of net worth, when rental rates rise. Since farm program payments are limited to the operator in a cash rent arrangement, the operator can claim his share through higher rent, but payment limits on the operator can sometimes be blamed for net worth decline.