The value of farmland is one of those topics that comes up at coffee shops. It's a measurement of the health of agriculture economy, and likely one of the numbers that makes farmers cringe a little. Working with clients in this area to determine what they can pay for cash rent is one way we help them.
There are several important factors to consider when forming a cash rent offer. First, look at the revenue potential from the new acreage using an average yield and price. Consider that prices can fluctuate over time. It is important to use a price estimate over a longer length of time if you are considering a multiple year lease.
Second, think about input costs; will this new piece of ground require additional fertility? At the very least, pencil in an average application of fertilizers, chemicals and seed. Remember to account for how this grain will be hauled, dried, and stored. Although each new acre increases input costs, there are many costs that are spread out by adding acres.
For example, with every acre you will incur incremental fuel and repair expense. However machinery depreciation, debt payments, and often family living expense can be spread out over your new total acreage. This efficiency increase may allow you to squeeze out the extra few dollars in cash rent.
I don't want to run up cash rent.
Bidding up cash rent isn't good for your reputation or your long term bottom line. It is important to balance your current cash rent obligations with any new ground to be sure everyone is getting a fair deal. This means keeping in close communication with your landlords. Some farming operations assign a partner to work specifically and pro-actively on landlord relationships. Update the landlord with the progress of the farm and ask them if they are happy with your current arrangement. Some growers even offer additional rent in a good year to help share the wealth. Being proactive in landlord relationships creates awareness and will allow you to address problems before it's too late.
How can I make sure a cash rent agreement is fair for both parties?
There are many ways you can structure your cash rent agreement, including flex lease and bonus structures. Analysis can be done to determine which one is the best fit.
Some considerations are:
• Should there be a minimum, or base, cash rent?
• Should there be a ceiling, or maximum, cash rent?
• Should the flex or bonus consider yield, price, or expense? How about a combination?
After thinking through all your options and determining which of these options will work, a lease can be designed to fluctuate. It could adjust to the ever-changing grain markets and field yields each year.
Overall, cash rent is going to stay an important option for land rental. Be realistic about the cost of land in your area, the expense of inputs, and the variability of both price and yield. You can structure a cash rent agreement that makes both the tenant and landlord happy.
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