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.
The point of this example is that while share rents are on the rise, their benefit to the farmer truly depends on the price situation, Schnitkey says.
Share Well. The reality is that share lease rates or the terms of crop share leases are established by the market, says Kevin Dhuyvetter, Kansas State University ag economist. When market reported rates are not sufficient to answer the question at hand, what do you do? While landowners and tenants ultimately determine terms of crop share and cash leases, he says to use equitable concepts to arrive at a starting point for negotiations—and to better understand the market.
Dhuyvetter says a good crop share lease should follow these principles:
1. Inputs that increase yields should be shared
2. Share arrangements should be re-evaluated as technology changes
3. Total returns divided in same proportion as resources contributed
4. Compensation for unused long-term investments at termination
5. Good communication between the landlord and tenant
Share leases provide a certainty that can appeal to farmers and landlords. One size doesn’t fit all, and open assessment and communication about what is fair to share in terms of cost risk and revenue is critical to a successful arrangement.
How Are Share Rents Divided?
A survey by the Department of Economics at Iowa State University was conducted to learn more about current leasing practices in Iowa. The table at right tallies the feedback from 500 respondants and shows how the various costs and management decisions are divided between landlords and tenants.
"The most common pattern was to divide the cost of seed, fertilizers, lime, herbicides and other pesticides evenly between the parties," says Bill Edwards, Iowa State University economist. Some tenants pay all of the costs to have fertilizer or pesticides custom applied, but most of the time costs were split evenly, he adds. This practice is encouraged by the fact that many dealers include the cost of custom application and applicator rental on the same bill as the cost of materials.
About half of the respondents surveyed said the landowner and tenant had an equal voice in choosing which crops to grow. The tenant alone usually made the decisions about what seed, fertilizer and pesticides to use, however.
Table: Iowa State University
- March 2013