This series on farm leasing has covered variable leases, relationships between owners and operators, and we conclude by looking at how to calculate a fair cash rental rate. The amount the owner wants and the amount the operator is willing to offer are both good starting points, and they will meet somewhere in the middle if an agreement is eventual. But how do you calculate a starting point and what is a fair agreement that does not take advantage of the other party?

Cash rents are replacing crop share arrangements as the dominant means of renting farmland, in part because an aging generation of owners does not want the record keeping fuss and their non-farm heirs are unfamiliar with fertility, biotech seed traits, and the FSA. And many operators find mailing a check once or twice a year is easier than sending monthly reports. So what is a reasonable approach to determining the rental rate?

At Iowa State University economists William Edwards and Don Hofstrand suggest a handful of alternatives, which may or may not work on your operation.
1) The going rate in the neighborhood can be a guide, if the farm in question is nearly identical to others in the region. Surveying other owners and operators to get a range of cash rental rates will allow a close determination, which can then be adjusted up or down because of pluses or minuses on the farm.
2) Rental rates can be tied to the long term average yield of crops on the farm, and then multiplied by the county average for cash rents. If that county average is $1.50 for corn and $4 for beans and the farm’s long term yield average is 160 bushels for corn and 45 bushels for beans, then the rent would fall in the $180 to $240 range.
3) By calculating a gross value of the crop, using the yield and an easily understood price, the owner would get a percentage of the gross, such as 35% or 45% with higher values for higher quality land. Calculations could be made for all crops and then averaged.
4) The owner’s investment in land should provide a return, just as if it were invested in some other equity, business, or security. The rental rate could be keyed to that expected return on investment. A 5% return on $5,000 farmland would result in a $250 cash rent.
5) If the operator, who is managing the books for the cash rent operation, computes the crop revenue and the cost of production, the owner’s cash rent share could be 50% of the net income. The owner benefits from not having to deal with crop-share details.
6) Another alternative based on production records is the tenant’s residual. Once the production expenses are deducted from the gross revenue, including machinery and labor costs, and a fee for management, then the residual becomes the rental payment to the landowner.

In addition to these possibilities in determining a fair rent, what is really fair in terms of a reasonable rental rate within the realm of today’s costs, prices, and yields? Software products have been developed by Extension economists to provide help with that issue.

Fair Rent, supplied by the University of Minnesota indicates what is affordable per acre, what happens if yields, prices, or costs vary, what yields will be required for the rent to be covered, and which share alternatives are better. The software cost is $95.

Farmland Lease Analysis, supplied by the University of Illinois aid tenants and landlords in determining the returns and risks from different farmland leases based on individual farm records and the arrangements of the proposed lease. The program offers comparisons of three types of leases: share rent, cash rent, and dry bushel leases. The software can be downloaded without charge.

Summary:
After two years of high commodity prices and rapidly rising rents and landowner expectations, many farm operators may be forced to accept cash rental rates above levels that can be expected by today’s lower commodity prices. How high an operator can bid should be determined by an analysis of production costs and break-even prices. There are many ways to determine a fair rent, but whether the rent is fair is determined by whether both sides of the arrangement are treated equally.