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Perspective

9/6/2007
By John Phipps
Perspective More Risk, Please

August has become the new crop-year start for many of us. Seed sales are being pushed earlier, fertilizer commitments are penciled in, and most important, land rent arrangements nailed down.
    Even with multiple-year contracts, this is not a fun exercise. In today’s agriculture economy, we all know which way rents are going. Moreover, too many contracts have to be re-bid too often against competition. This shaky sense of control over the critical asset needed for prolonging our careers seems to be intensifying.
    Adding to this insecurity are technologies from biotech to GPS that reduce human contribution (protecting the corn, driving the tractor, etc.) while simultaneously extending our capacity to farm much more land with fewer people.
    Anecdotal evidence would seem to justify our disquiet. As a result, farmers are employing various strategies to mitigate risk in renting land. The most popular is lecturing landowners on how they should structure their dealings with us.

    Risk management. The big argument is around production and marketing risk associated with farming. Perhaps conditioned by success in brokering risks into government support, farmers are applying the same moral assertion to rental standards.
    With either amazing naiveté or breathtaking gall, tenants are spelling out the “right” way to rent ground. In this effort they are abetted by ag economists who speak seriously about how risk should be shared, not foisted upon tenants. For those producers who have the presumption to consider alternative terms, frequent analyses point out imminent catastrophes that lurk along such a path.
    All this justification may be wasted breath. Farmers are not helpless pawns of circumstances. Many are instinctively or methodically moving to capitalize on this reluctance by colleagues to assume risk by facing up to one unspoken fact: We make money by enduring risk. Storing grain is a classic example.
    Similarly, some producers find there is an advantage in assuming the land-owner’s traditional risk with fixed cash rents at market rates. In essence, they are responding to their tenants’ insistence that landowners should share risk by asking “Why?”

    Different options. But the future may look different. Simple market forces make me think we’re headed toward evolving cash rent contracts. Mostly longer terms. According to Top Producer research, 20% of you agree, and are negotiating longer contracts. It makes good sense.
    Tenants want secure tenure, landowners want optimal returns. One approach might be a long-term (20- to 25-year) contracts. To compensate for changing conditions, participants could use a rental “basis” tied to a reliable annual rental market survey (typically available from Extension data).
    For example, if you’re currently paying $190 and the applicable survey figure is $150, your rental basis is “$40 over.” Alternatively, a ratio could be used—in this case 127%. Rents can thus be adjusted automatically during the contract term. Rental minimums (floors) could be featured, as well. The usual professional performance verbiage (maintenance, records, etc.) would undoubtedly be included.
    There is considerable interest in variable cash leases, but some landowners are uninterested in marketing, FSA paperwork, and unknowns. How the FSA would treat a variable lease based on the rent market is anybody’s guess, but there are possible solutions.
    In addition, first year “signing bonuses”—either in the form of cash or improvements, such as bins or tile—could induce landowners to sign, especially since tenants would benefit from them, as well. Up front payments also price in the risk that high bidders would “walk” in mid-contract if farm conditions wind up heading south. Allegations that cash renters “mine” the land would be negated as tenants would now live with the consequences.
    While this will be unwelcome to those who feel producers can barely cope already, I know there are operators who are taking advantage of their own contrastingly confident outlook.
    What is often forgotten in the hand-wringing of the producers plight is some of us believe we can manage more risk—or perhaps simply perceive actual risk levels are lower than advertised. Offering risk relief to landowners demonstrates industrial grain farming is now essentially a service industry where the client’s (landowner) needs should be uppermost.

John Phipps, johnwphipps@gmail.com, is a sixth-generation farmer from Chrisman, Ill. He is the TV host of “U.S. Farm Report.” For local station listings, log on to www.AgWeb.com.

Top Producer, September 2007

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