Changing Times, Changing Cash Rents

By Jane Fyksen Crops Editor
Thursday, October 9, 2008 7:22 AM CDT

Producers, though busy with fall harvest, shouldn’t neglect reviewing their lease arrangements earlier than usual this year and adjusting for what appears will be an equally volatile crop-year in 2009.

“Determining a fixed cash rent in the current environment is a difficult task and will likely require multiple discussions between landlords and tenants,” says Craig Dobbins, Purdue Extension farm lease and business arrangements specialist. “As long as people keep communicating with each other, they will eventually find a number that is agreeable and equitable.” Producers should enter such discussions well-prepared to lay out their costs and increasing risk.

Don’t just base discussions around the typical cash rent for your area. Multiple factors influence cash rents, including land productivity, drainage capability and the condition of existing tiles, soil fertility, condition of existing facilities, unpaid services provided by the tenant, such as mowing or spraying ditches, maintaining fence rows, repairing tile, maintaining lanes or roads on the farm; and the location and size of the farm, as well as field shape and size.

One method of determining rent requires the landowner know quite a bit about the property, including the productivity level. Next year's prices are estimated, as well as production costs. Dobbins recommends using the futures market as a guide.

“If you add up the revenues and subtract the cost estimates, which should include operating costs such as fertilizer, seed, chemicals, and labor and machinery overhead, you are left with an estimate of the amount of money remaining for the land,” he says. “Economists like to think about land as being the residual claimant, so it gets what's leftover after everything else has been paid. This is one way to arrive at an estimate of what one can afford to pay for a cash rent.”

USDA conducts an annual survey of cash rents for every state; that information is at http://usda.mannlib.cornell.edu/usda/current/AgriLandVa/AgriLandVa-08-04-2008.pdf.

People can try and calculate the cash rent and then compare that number to a survey. “If you end up with a number similar to what the survey shows, you can feel pretty good that it's a reasonable number,” Dobbins notes.

To landlords, he says, “If you want to know what the market would provide, there is always the option to put your farm up for bids. This could generate more interest than you want, but is probably the most precise way of knowing what the market is willing to provide for your particular property.”

William Edwards, Iowa State University farm business management specialist, says that while grain producers have been enjoying record-high prices and sizable products for their last couple crops, higher input prices will eat into margins in 2009. Many have already been confronted with soaring fertilizer prices, payable in advance.

Gary Schnitkey, University of Illinois farm management specialist, has estimated non-land costs of production (in Illinois) could be up $141 per acre for corn and $82 per acre for soybeans from 2008 to 2009. Mike Duffy from Iowa State University has estimated increases of $120 to $140 per acre for corn and $65 per acre for soybeans next year. However, actual prices for many inputs could change significantly by this coming winter.

Total dollars needed to plant a crop next spring may find some operators exceeding their operating line limits from past years. An early consultation with your short-term lender is also advised, to adjust credit availability to the new cost levels. Fortunately, notes Edwards, profits from the past two years have made it possible for many producers with high levels of operating debt to pay down their balances. More valuable crop inventories have made current ratios and operating capital values look healthier as well.

Edwards says rents that were renegotiated for this season may not change much for 2009, but rents that are still at earlier levels will need to be brought up to current market levels.

Some have developed flexible cash leases in the past two years, with cash rents determined by actual yields and prices available at or prior to harvest. Often a base rent is specified, with a bonus paid when gross revenue exceeds a certain level.

One easy way to reflect higher input costs in a flexible lease is to increase the level of gross revenue needed to trigger a bonus payment. In other words, start sharing revenue after the tenant has earned enough to cover all non-land costs plus the base rent, he says.

Steven Johnson, an Iowa State University ag business management field specialist, notes that while flexible or bonus cash leases make up a small percentage of cash rent lease arrangements to date, interest in these types of leases is increasing rapidly. That’s because the additional payment above an established base rent is getting triggered from revenue (yield times price).

“That additional flexible rent payment can be determined by the specific farm revenue or by the county average revenue,” he says, noting that if the revenue reflects the yield and/or price from that farm, then the FSA office will likely determine it’s a share lease and the tenant should share a portion of the government farm program payments with the landlord.

To avoid additional FSA and specific farm record keeping, many tenants and landlords may choose the posted county price to determine the county average revenue for that crop year in order to finalize the size of that “flex payment.” In such a case, that payment won’t be made until at least March following harvest, when the final county yields are determined by the National Ag Statistics Service.

Johnson notes that interest in flexible cash leases is likely to rise for 2009 once tenants and landowners understand that beginning next year, revenue triggers at both the state and farm levels are a major portion of the new Average Crop Revenue Election (ACRE) payment; they’ll see that leases can be structured in a similar fashion.

“These revenue concepts will be incorporated by both tenants and landlords to write multi-year leases that benefit both parties through the 2012 crop year, the last year of the ACRE program,” Johnson predicts.

In addition, he says farms that enroll in ACRE in 2009 will likely need to prove their actual farm yields by FSA farm number beginning with the 2004 crop year. That’s because ACRE requires the use of both state and farm yields using a five-year Olympic average for planted acreage. For some farms, the easiest year to prove yields will be 2008 when scale tickets, settlement sheets, grain bin measurements, and yield monitor data can be segregated by FSA farm number during and immediately following harvest.

More information can be had at Johnson’s website at http://www.extension.iastate.edu/polk/farmmanagement.htm.

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