What is in this article?:
- High-Rent Hangover | Have a Plan for $3.50 Corn, $8.50 Soybeans
- Decision-Making Tools
- Cause for concern
Use available tools to evaluate rents for potentially lower price scenarios, say farm management specialists. For example, the University of Illinois FAST (Farm Analysis Solution Tools) downloadable grain farm budget projection tool calculates per-acre budgets for different crops and a whole farm budget that includes breakevens.
Projected financial statements and return sensitivities are available, and the effects of farm level crop insurance and hedging can be analyzed. The cash rent with bonus worksheet allows you to set parameters of cash rent with bonus leasing arrangements and then calculates cash rents under alternative prices and yields (http://bit.ly/z5mg8d).
For example, the table above set with default values shows that for 200-bu. corn, rent values could be $200/acre with $3.50 corn and $512/acre for $7.50 corn. The target cash rent is 30%
of crop revenue. Figures can be changed to fit individual operations.
Similarly, Kansas State University Extension offers an Excel spreadsheet called KSU-lease.xls available through www.AgManager.info. The spreadsheet budgeting program allows farmers to determine equitable crop share and cash lease rental arrangements. Kevin Dhuyvetter, KSU Extension agricultural economist, says the underlying data are crop budgets, which can be tailored for the impact of cash prices, and how prices affect returns at given cash rent levels.
"All farmers really need is a crop budget to look at how prices and rents might impact their bottom line," Dhuyvetter says. "Given the outlook for lower prices in the long run, farmers could move back to crop share arrangements, which won't likely happen, or develop flexible cash leases, although that won't fix leases already in place. None of us know where crop prices are going, and thus establishing fixed cash rents is extremely difficult and risky for both parties."
Steve Johnson, Iowa State University (ISU) farm and ag business field management specialist, agrees that crop price volatility in recent years has made it difficult to use fixed cash rental rates. "Landowners that adapt to flexible cash farm leases receive a guaranteed base cash rent amount, in addition to a flex payment triggered by higher gross revenue (yields and/or price)," he says. "With a decline in crop prices, the potential risk of setting high fixed cash rents becomes a concern. Flexible cash farm leases will likely be fairer to both landowner and tenant.
"The challenge can be determining a base rent amount, maximum cash rent and way to calculate a flex payment," Johnson adds. "Maximum rent tends to be about $100/acre above the pre-established base. Having a maximum rent is a safeguard for a tenant to better figure potential cost of production, calculate breakevens and implement pre-harvest marketing strategies."
ISU has a flexible lease agreement worksheet on its Extension website, http://bit.ly/xgz93i.