4 Farmland Leasing Tactics to Employ

August 28, 2018 08:06 PM
 
There’s no one-size-fits all solution when it comes to determining cash rent rates. No matter which side of the fence you’re on it’s important to know current trends and consider all your options.

Strategy

There’s no “easy button” or one-size-fits all solution when it comes to determining cash rent rates. No matter which side of the fence you’re on—landowner or farmer—it’s important to know current trends and consider all your options.

Understand your leasing options.

“Generally, there are three main types of leases: share rent, cash rent and variable cash leases,” says Gary Schnitkey, University of Illinois economist. While cash rent is the most popular option, Schnitkey recommends variable cash leases because they’re fair to landowners and tenants.

Share rent leases require the landowner to share in the expenses, which varies depending on the productivity of the land. This increases the potential risk for the landowner because while they’re sharing in 50% of the revenue, they also must absorb 50% of the cost.

Cash rent is an easy option, especially for landlords, and it’s where a lot of the country has moved. However, it’s hard to set a fair value.

In variable cash leases tenants pay a base level and might make a higher payment if a certain percent of cash revenue is above the base—tenants pay landowners that difference.

Know where to cut costs and where not to.

Typically, cash rents follow real estate values. But, cash rents lag on the way up and way down, says Tim Koch, chief credit officer for Farm Credit Services of America.

This means, these discussions won’t get any easier. Start these conversations soon, as Sept. 1 is the annual renewal (or termination) date for farmland leases in most states.

Also, use this time before harvest to create a 2019 budget, so you can make smart decisions around your crop mix, machinery maintenance costs, family living options, etc. Understand your overall cost structure, so you can know where to make modifications.

It’s one thing to cut costs on inputs, equipment or simply by tightening the belt to level that would be the envy of a good pair of vice-grips; but cutting costs on land might cost you in the long run.

Ultimately, bushels are what make money. Cost per acre matters, price matters, but bushels are what actually bring in dollars and cutting yield short by renting cheaper land could cost more.

CORN FOLLOWING SOYBEAN EXPENSES
(VIA WELLS FARGO INSIGHT)

IN $/BU.

Low Yield

Average Yield

High Yield

Spread, Low

to High

CORN YIELD

136

170

204

68

VARIABLE COST

$2.74

$2.43

$2.12

$(0.62)

MACHINERY OWNERSHIP

$0.74

$0.59

$0.49

$(0.25)

FAMILY AND HIRED LABOR

$0.27

$0.22

$0.18

$(0.09)

CASH RENT

$1.11

$1.15

$1.21

$0.10

TOTAL COST

$4.86

$4.38

$4.00

$(0.86)

 

Know how to have “the talk.”

The clock is ticking. Cash rent negotiations can be unnerving, especially if you are asking for a rental reduction. The current cloudy profitability and policy picture adds even more pressure this year.

These four negotiating strategies will built confidence and put you on the right path for a productive conversation.

Outline a meeting schedule.

Most farmers have several landlords. With Sept. 1 being the annual renewal (or termination) date for farmland leases in most states, time is ticking.

Do your homework.

The best way to increase your personal confidence in negotiations is to be prepared. Block out time to prepare and think through each conversation.

Plan on multiple meetings with each landlord.

“There’s a false belief that a negotiation must be completed before you leave,” says Mark Faust, business consultant and columnist for AgPro. “It’s better to slow it down and space out the conversation to make sure it’s a win-win for both parties.”

After that initial meeting, schedule another time to actually decide on the rental rate. “In two or three conversations, you can refine and zero in on what you want to agree to, without rushing it,” Faust says.

Present multiple options—not “yes” or “no.”

Most people come into negotiations with undefined goals. Instead of a specific target, they just want to “move the needle” on a price. That’s not adequate, Faust says.

Know when to say no.

According to Brent Gloy, a farmer and former agriculture economist at Purdue University, cash rents are expensive right now and negotiating lower isn’t always an option.

If you’re unable to get rents to an affordable level, it’s time to consider walking away. Gloy recommends farmers consider land quality, yield and market opportunities when thinking about letting go of land.

Top Producer columnist Chris Barron suggests grading your rental property to decide if it’s worth renting or it’s time to walk away. If any of your farms grade is below a 3/C you might want to seriously consider whether that property is beneficial enough for your operation. When cash flows are tight and profit margins are difficult to achieve, any additional analysis can benefit your decision-making process.

(Click here to read more from Chris Barron and download the free file to grade your rental property.)

 

Read more related content

Farmland Market in Tight Balance

The Question: To Rent or Not to Rent?

Nail Your 2019 Land Lease Agreement

Strategies to Nail Your Cash Rent Negociations

The True Cost of Cheap Rent

Volatile Markets Make Setting Cash Rent Even Tougher

Cash Rented Farmland: How Do You Know It’s Time to Walk Away?

Dial In 2019 Land Rent Costs

 

Resources

Iowa State University

Computing a Cropland Cash Rental Rate

Cash Rental Rates for Iowa 2018 Survey

 

University of Missouri

2018 Cash Rental Rates in Missouri

 

University of Nebraska-Lincoln

2018 Trends in Nebraska Farmland Values and Rental Rates

 

University of Illinois

Data and Outlook for Making 2018 Cash Rental Decisions

 

 

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