High commodity prices do not necessarily bring out the best in people. The fact that a grower may have farmed a particular piece of land for over 30 years or that he is farming it for a relative, in many cases will have little impact on whether that grower rents that land next year.
We're entering that time of year where many land rental contracts are being renegotiated. Last year there was some tension, but it will be nothing compared to what people will go through in the next few months.
I'm not sure I want to use the word “greed” for landlords in this environment; it's simply that they want to get the most return on their assets that they can. Some would call that good business, but I would argue on the behalf of both sides that there needs to be some reasonable common sense involved in renting land this coming year.
Even if a producer did a poor job of marketing this past year, they still should have had an outstanding financial year.
Now, everyone wants a piece of the pie — including the landlord. Granted, input prices have gone up considerably and land prices in most areas of the Midwest have more than doubled in less than two years. So when you sit down to negotiate rent for 2009, take a look at some issues that may help both sides take emotion out of the process.
To begin, we need to make some assumptions. First is that $7 corn and $16 soybeans are not practical. And unless something major changes, we're not going to see those prices. On the other hand, we're not likely to see $3.50 corn or $7 soybeans. I think some realistic numbers to use in budgeting might be $5.50-6 corn and $11-13 soybeans.
FROM A FARMER'S perspective, it's important to lock in as long a contract term as possible. If you invest in equipment to farm 3,000 acres and then suddenly lose half of that acreage, the economic impact is not going to be pretty. So, try to lock in at least three-year terms in order to assure the spread of capital costs over time.
I have a tendency to favor flexible rental contracts rather than fixed. For example, let's say a farm rented last year for $200/acre and now the landlord wants $350/acre. That might be reasonable if you had 200-bu. corn at $6/bu. It wouldn't be reasonable, however, if the crop produced 170 bu./acre at $4.50/bu.
With stakes this high, why not do something more flexible where each party shares in some of the risk. In this case, put the rent at $300 and do a revenue split on gross income above $900/acre (this is an example only).
The old-fashioned share crop is probably the most fair in all of these circumstances.
Should the landlord put the farmer in financial jeopardy of not being able to farm next year? In my opinion, if I was the landlord, I'd also want some consistency in who is farming my land.
TOP PRICE NOT ALWAYS BEST
The owner of the property needs to maximize his returns. But the top price may not be the best avenue for the property owner in the long term. Don't put yourself in a position of trying to get the top price and wind up having a different producer farm your land every year as a result.
Look at the long-term impact on maintaining your land quality and having a producer who you enjoy doing business with farm your land. Like it or not, you're in business together.
Professional farm managers in recent years have done an excellent job in negotiating contracts. With this type of volatility, I think this trend will continue.
Many times it takes a third party to make both sides understand what's reasonable. For the long-term benefit of both parties, everyone needs to be comfortable with the terms of the contract, and fairness is the only way for long-term satisfaction.
Richard Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.