High-Value Rent Considerations

December 12, 2011 07:06 PM
High-Value Rent Considerations

With sky-high rents, analyzing soil productivity is more important than ever

With farmland rents now approaching $500 per acre in some parts of the heartland, it’s crucial for producers to carefully analyze the production potential of rental land before they sign on the bottom line.

"What’s important is the quality of soils and the farm—there is a big difference in quality," says Randy Hertz, vice president of Hertz Farm Management in Nevada, Iowa. "Soils, drainage, fertility level, weed control—each influences crop yields."

Land evaluation. The quality of tile drainage is a big factor and can make a 30 bu. to 40 bu. per acre difference in corn yields, Hertz says. Because of that, it’s important to obtain drainage maps, if available. If they are not, producers should evaluate the drainage system and check the drainage tile outlet.

Land that requires tiling provides an opportunity for producers, particularly younger ones who need land, to rent below market rates if they’re able and willing to do tiling for the landowner.
"Say the market is $300 per acre, but you’re able to offer only $275. If you have a tiling machine, you may be able to trade labor so the landowner only pays for the tile," says Howard Halderman, president of Halderman Farm Management Service in Wabash, Ind.

"Such a capital land improvement is a big win for the landowner," he adds, while the tenant benefits by increasing the yield potential of the land, plus bringing the rent down to where it fits within his budget.

Other capital improvements that landowners might agree to accept in lieu of top rental dollar are tearing out fence rows, picking up rocks and doing work on the edge of the woods. "Capital improvements you do can create additional value in a lease," Halderman explains.

For farmers further west, irrigation is a crucial area that should be considered before leasing land. Important factors include the quality of irrigation equipment, water capacity, gallons per minute that can be pumped, and whether there are local, state and federal water restrictions. In addition, producers need to know whether they can grow all corn or must plant wheat on part of the ground, which provides a lower return.

Request information. Halderman advises producers to request yield maps and soil tests. If these are not available, producers can ask to do their own soil tests and to look at crop insurance actual production history reports for a history of yields from the land. With so much competition for rental land and many potential tenants who will be unknown to the land-owner, Halderman recommends that farmers develop a farm resumé that contains photos of equipment, buildings, family and work force and a detailed history of production.

A lot can be learned about land quality from satellite imagines, which includes productivity indexes, says William Edwards, an ag economist at Iowa State University.

Hertz notes that many states in the Midwest have some kind of land productivity index that provides an objective look at the quality of land.

Edwards also suggests that farmers ask whether the land has a conservation plan that requires certain management practices.

"Tenants should farm in a region where they know the soil types and weather," advises Don McCabe, manager of Soy Capital Ag Services in Kankakee, Ill.

Look at current market prices and price expectations. "A year ago, corn was $3.80 and went to $7," McCabe says. Because of that, he recommends rental agreements with variable components, since they are fair to both the landowner and the tenant.

McCabe says that while some landlords want the top dollar they can get for their land, others do not. "I’ve seen some landlords get an offer and say, ‘That’s too much.’ That’s when you can have a meeting of the minds."

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