How to decide if ground is reducing your profitability
As you look at your rented-land portfolio, consider whether a certain parcel could be pushing your operation into the red. Are you paying more in cash rent than you expect to earn back in profits?
“The decision to drop a parcel is multi-dimensional,” says Mykel Taylor, ag economist at Kansas State University. Farm profitability is projected to be weak for several more years, so Taylor says farmers need to create a framework to analyze each piece of ground they rent.
Use it as an opportunity to improve your business’ future, suggests Mark Gannon, owner of Gannon Real Estate & Consulting in Ames, Iowa.
“You want to get rid of marginal farms to be ready for the right one that comes along,” Gannon says. “Think about it like a cattle producer. They should be culling out the bottom 10% every year, as long as you can grow and replace. Think about your farmland the same way.”
What costs are associated with the rented ground? Tabulate expenses and production history for every rented parcel. “The longer you have been farming it the better, because you have better data,” Taylor says.
Variable costs such as fertilizer, chemicals, seed, fuel and labor can be avoided if you don’t farm a parcel. The trade-off is fixed costs such as depreciation on machinery will be spread over fewer acres.
To decide whether you should continue renting a farm, these experts recommend answering several questions (see below).
4 Questions to Ask Before You Walk
1. How long do you expect to rent a piece of ground? “It can take four or five years to build up productivity,” says Mark Gannon, owner of Gannon Real Estate & Consulting. “Take into account what the projected longevity is of renting the piece of land. If the owners are fickle or they won’t own it for very long, you won’t have time to build up the soil.”
2. Can you negotiate a less expensive rent? Arriving at a lower rent is difficult, admits Mykel Taylor, ag economist at Kansas State University. “Landowners may drop a tenant rather than take a lower rate,” Taylor says. Because most leases in Kansas average three to five years, she suggests switching to a single-year rental rate to allow for adjustment up as soon as profits improve. You can also suggest a flex lease or crop share to share risk. The key for these negotiations is to do your homework. Renters should do a five-year average of their farm income and expenses before meeting with the landlord, adds Joe Koenen, agriculture business specialist with University of Missouri Extension. “Do not pressure your landlord to accept an unrealistic lower rate,” Koenen says. Instead, remind landowners you are a good steward of their land. Offer something of value to offset the feeling they are losing. You can offer services such as plowing snow on landowners’ roads, marketing timber on their property or fixing fences.
3. What are the pros and cons of a piece of rented ground? How close is a farm to the others in your portfolio? Does it cause logistical headaches? How do its yields compare to other farms? You should also account for the relationship between you and your landlord that could be damaged if you decide not to rent a farm, Taylor says, especially if you are related to the landlord.
4. Will you be able to replace the rented land in the future? During the past few years, Gannon has seen farmland lease renewals in his region be delayed compared to previous years. As farmers retire or can’t meet financial obligations, landlords are seeking new tenants, sometimes even in the spring. “Land will become available,” he says. “Farmers need to build their reputation as being professional operations that treat people well and are open about their communication. That word will get around, and landlords will come looking for you.”