A handshake agreement on cash rent is still a done deal for many. Just remember, it likely won’t hold up in a civil suit.
“It can take 20 years or more to be in a position to ask to rent a farm,” says Tim Stebbins, who rents about two-thirds of the acres he and his brother George farm in southwestern Ohio near Englewood.
Being at the head of the line with favorable payment capabilities, a good rent and farming record can help seal the deal. “But for land that comes up open for bidding, you can face competing bodies from 40 miles or more away,” says Stebbins. “We’re fortunate to have 14 landlords who work with us to determine a rent price that’s fair to us both.”
Cash rents have leveled off for 2010, says Barry Ward, Ohio State University ag economist. “There could be some decreases in flex leases. But we probably won’t see many straight cash-rent decreases for 2011.”
The numerous farms the Stebbins rent are in 50-60-acre plots. Little acts of kindness promote good landlord relations, which comes in handy when it’s rent-bidding time. “They don’t forget those things,” says Stebbins. “We control noxious weeds and do other cleanup, and help with snow removal.”
Flex rents
Negotiations got extra serious in the 2008 price-busting year. Flexible cash rents became more popular. Typically, a flex rent will include a base cash rent or one-third value of the crop, whichever is greater.
An example from William Edwards, Iowa State University Extension economist, shows base rent at $100 as the guaranteed rate. Compare that to a 150-bu. corn yield x the Dec. 15 price x 1/3. If the price is at $3/bu., that puts the flex amount at about $150. That’s about the same flex rate for 50-bu. soybeans selling for $9/bu. on Nov. 15. (See sidebar for additional flex rent examples.)
Ward says “fertilizer prices are still being considered in (flex) lease agreements.”
Stebbins says cash rent in his area has increased by 25-35% since 2008. “We also have provided landlords with a bonus on top of the negotiated rent. If my share got too lopsided, I voluntarily compensated the landowner. It creates goodwill.”
Rents range widely across the Corn Belt. “Top crop land in western Ohio rented for an average of about $180/acre in 2010,” says Ward – about 93¢/bu. on the region’s typical 192-bu. yield. “Flex leases on prime land can mean an extra $70-80/acre over the $200 base rent in a good year.”
The “top crop land” cash rent averaged roughly 3.4% of the land value in 2010 and is expected to be near that for 2011, he adds.
Average crop land in western Ohio, which yields 157-bu. corn, rented for about $142/acre in 2010, or about 3.2% of the total land value. Poor western Ohio cropland goes for about $102/acre, or about 2.8% of the land value.
“Costs can vary by $50-75/acre based on soil quality,” notes Stebbins. “Plots above 2,000 acres will likely rent for more than those with 100 acres. We can see $100 cash rent and have paid $300 shares.”
FLEX RENTS VARY
Flexible cash rents can be based on gross revenue, yield only or both included as bonuses to a base rate, says William Edwards, Iowa State University Extension economist.
“Some agreements can also include government payments in the gross revenue,” he says. “Others may specify a maximum and/or minimum rent.”
Barry Ward, Ohio State University (OSU) Extension economist, suggests growers examine the OSU Flexible Cash Lease Calculator to help determine their minimum and maximum cash rents, depending on their crop inputs and expected price. It is located at http://bit.ly/diPS4I.
Examples of gross revenue flexes (as taken from growers surveys through ISU) are:
Edwards says a base rent plus a bonus situation can also take different approaches. “Base revenue may be equal to a long-run average value for gross revenue, or the amount of revenue the tenant needs in order to pay all non-land production costs plus the base rent,” he notes.
Examples of base rent plus bonuses are:
Edwards says that profit-sharing flex rent agreements “estimate the profit each year after paying all other production costs and divide it between the tenant and the owner.
“Under these leases the owner bears some of risk of increasing production costs as well as yield and price risk,” he adds. Edwards stresses that no matter what type flex or other lease agreement you negotiate, it’s important to describe the procedure for determining the final rent in writing, with some examples to illustrate it. The lease should be on file at the FSA office.
(For more on flex cash rent, go to http://bit.ly/ba53xN.)
Food for thought
Consider the following in evaluating your rent.
University of Illinois economist Gary Schnitkey points out that while corn input costs have slipped about $100/acre in the past year, 2010's non-land expenses remained the second highest in history for farmers enrolled in the state's Farm Business Farm Management records program. It now takes about $600/acre to plant an acre of corn vs. $400 a few years back.
September 2010