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Farmers Looking to Share Agreements

February 27, 2013
By: Jeanne Bernick, Top Producer Editor
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Volatility has more producers looking to divvy risk with landowners

In contrast to national trends, acreage in high-yielding farming areas is increasingly rented, not owned.

Only 41% of farmland acreage in Illinois is owner–operated, according to a recent USDA Agricultural Resource and Management Survey. Roughly the same amount is rented under fixed or flexible cash agreement. Share rental agreements account for a larger portion of Illinois farmland acreage (18%) than the U.S. as a whole (7%).

The average farm has three rental agreements in place. These include fixed or flexible cash rent, crop share and free rental agreements.

Under share rental arrangements, it’s important to remember that landowner and farmer returns vary with differing prices, notes Gary Schnitkey, University of Illinois ag economist. "If corn and soybean prices decline to their long-run averages, returns will be less than 2013 projections," Schnitkey says. "Landowners who cash rent farmland might see rents decline as a result of renegotiations due to low returns to farmers."

In the above table, Schnitkey calculated operator and farmland returns for three price scenarios:

• 2013 projected: $5.50 per bushel corn and $12.50 per bushel beans

• Long-run: $4.50 per bushel corn and $10.50 per bushel beans

• Low: $3.50 per bushel corn and $8.50 per bushel beans

For high-productivity farmland, the operator and farmland return is $510 per acre with 2013 projected prices. Returns are reduced to $341 per acre under long-run prices, and $172 per acre under low prices.

The split of operator and farmland returns between farmer and landlord is calculated for a lease that shares revenue and direct costs (fertilizer, seed, chemicals, drying, storage and crop insurance) on a 50/50 share between the landowner and farmer.  The farmer also pays the landlord an additional rent of $25 per acre for high-productivity farmland and $15 for low-productivity farmland.

For high-productivity farmland, the $510 return under 2013 projected prices is split such that the landowner receives $351 per acre and the farmer receives $159. Relative to historical returns, these figures are high. For high-productivity farmland, long-run prices result in a landowner return of $267 per acre, which is lower than the cash rents in many central Illinois counties, Schnitkey notes. 

For low prices, the landowner return is $182 per acre and the farmer return is -$10 per acre. The low landowner return is below the expectations of many at this time. The negative farmer return would deteriorate the financial positions of farms.

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FEATURED IN: Top Producer - March 2013

 

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