By Harry Brook
Figuring out land rental on an annual basis is not an easy task. Some things to consider include crop or livestock prices, potential yield, length of lease, crop share or cash, timing of payment and dealing with price risk. As a landowner, you don’t want to be taken advantage of or price the lease too low. As a land renter, you can’t afford to pay too much but have to weigh the costs of renting against potential profits. Local competition for land also plays a part in cash rents.
There are two main types of rental agreements. There is the cash rent, where the renter pays the owner an agreed upon amount, at a certain time, usually after the crop has been harvested. It can also be a split amount with an initial payment and final payment. Terms can vary between an annual rental up to a long-term rental agreement of five years or more. A lease needs to be fair to both the landowner and renter. Using a one-year lease might mean that the renter could have little interest in managing the lease for the long term, instead, needing to maximize value for the one year they have it. Longer term leases allow for a more varied crop rotation and the opportunity to possibly add hay or other, long-term crops in the mix, improving soil quality and reducing risks from problems like resistant weeds or diseases.
Part of the difficulty in determining cash rental rates is that the productive value of land varies from one piece to another. No two quarters are created equal. On top of that, you have local supply and demand that can drive rental rates beyond what would normally be expected. Then there is personal preference of the landowner. They might be renting to a family member or friend, which can affect the rental rate.
Cash rent has the renter take all the production and price risk on the crop. There are also crop share agreements where the landowner pays for a part of the inputs, usually fertilizer and seed, therefore taking some of the production risk. These are often set up as one-third or one-quarter to the landowner and two-thirds or three-quarters to the renter. They pay for part of the inputs and get a proportion of the yield, thus sharing some of the production risk. It has the added benefit of the landowner still qualifying as a farmer, giving some tax benefits.
There are other variations on cash rentals, where the owner shares in price risk. One of these is where the owner is paid a cash amount but based on a set yield-per-acre of the crop with the prices set at a particular date or futures price. For example, years ago, I came across a landowner who was paid the value of the first 12 bushels of barley at a set time of the year.
Land rentals are wide open for negotiations and there are different ways of doing them. They need to meet at least three basic principles. Leases should be flexible enough to permit fair adjustments in any unexpected situations. A lease should be adapted to suit each individual situation, yet remain simple enough to work. And the lease period should also be long enough to allow the producer to adopt good farming practices.
Oftentimes, we want to have a simple number to use as a rental rate. However, the number of factors that go into the individual rental rates is much more complex and nuanced. It takes time to negotiate a good rental agreement as well as understanding on both parties as to the goals of each individual. Good lease agreements check all the boxes and provide for both parties. Despite the high crop prices this year, it is really no indication what crop value will do next year. A good agreement is based on trust and mutual respect. Take the time to do it right to benefit both parties.