Cull rented farms like ranchers cull cattle.
Is cash rent too high? I'm often asked that question. The honest answer is, “It depends.” Let me explain.
The example in the table below, from a client, leads to some interesting conclusions. I see many similar situations with other farmers we work with.
First, the profit and cash rent variance surprises most people. From top to bottom, the profit per acre, which is the same as return to labor and management, varies just a penny under $129. Many farms we see have even more variance.
Second, take out the top and bottom farms, assuming they may be aberrations, and look at the data again. Of the remaining farms, the one with the most profit has the highest cash rent and, conversely, the lowest-profit farm has the lowest cash rent. This is the case in two out of three analyses done by our clients.
Is cash rent too high? It depends. In this case, the cheapest one is too high.
Our clients run these analyses on “Profit Maker” software, a program we can provide with our service. It's user-friendly and each farm analysis can be done in about 10 minutes. You can allocate the passes and implements used, farm by farm.
An easy way to complete the analyses is by using your land grant university's estimated costs for tillage, spraying and harvesting rates. This keeps the farms on an apples-to-apples basis. Using your actual costs is even better if you have accurate data that reflects all costs.
Combine this with yield monitor data and farm program payment income per farm and you have real comparative data to make decisions on a farm-by-farm basis.
How many years' data should you have? Obviously, one year isn't enough; two can surely begin to tell you something; and three is a trend. Plus, if your geographic area is somewhat concentrated, you have better comparative data.
Generally, one year of corn and one of soybeans can identify a problem — especially if there weren't any unusual environmental factors, such as hail or green snap.
My favorite mentor, the late Tom Franey, once told me, “Sooner or later a poor farm and a poor farmer will get together.” He was referring to production talent. Today, there's less difference in production ability than in the ability to turn farm data into business savvy. That separates the top from the rest.
Data like that below can help in two other ways. One is in managing landlord relationships. Let's say, using the example below, that landlord #12 comes to you (Farm #13 had hail damage) and wants a cash rent increase. It's very handy to pull out these records and show him/her that you're already paying more than you should.
If your landlord decides to rent the farm to someone else, you've just culled a poor farm and someone else has the problem. Most likely, it's your competition.
On the other hand, if a landlord at the top of the profit list comes to you to increase rent, don't pull out these records. Instead, pull out your checkbook and negotiate the smallest increase you can.
A client recently made a comment that is so true. He said, “My operation grosses $2.5 million/year. The local McDonald's does that and look at the processes, analysis and outside consultation it uses.” Why should your business be any different?
You have between now and Sept. 1 (typically) to notify your landlord if you don't want to rent a farm for next year. That will help you position yourself to manage the risk and be “Riskwise.”
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell previously spent 26 years with Farm Credit Services as a division president. For more risk management tips, check his Web site (www.russellconsulting.net) or call toll-free 877-333-6135.