Posts Tagged ‘rent land’

Rent Practices

Friday, January 13th, 2012

Earlier this week, I was speaking with an attorney who deals with mainly ag-related clients.  We touched on a topic that is a popular one in his and most communities – cash rent.  While the dramatic rise in farmland prices the last 12 months has grabbed most of the headlines, cash rents have remained more in the back seat.  While there have certainly been stories about farmers in Central IL paying upwards of $500/A for prime ground, it’s is the other end of the spectrum that is the most interesting.  He said that he was surprised that in his area, southern Illinois, many farmers are resisting updating their rent payments to keep them in line with market value.  For example, he mentioned that there are many cash rent contracts that were signed for 2012 at $90 – $120 per acre, where if those farms were opened up to the market they would fetch closer to $230 – $250 per acre.  In past projects we have worked on, we have unfortunately come across more than a few cash rent contracts that were way under what the market would dictate.  From the farmer’s perspective, he wants to maximize his profitability, so the less cash rent he pays, the more money he makes.  However, from a “big-picture” perspective, the farmer may be better to pay in the neighborhood of what his local market is dictating, rather than risk upsetting the owner and losing the farm to a competitor.

I think this is a main reason why in many areas across the Midwest a growing number of tenants and landlords are moving back towards a more traditional shared lease, so that both the farmer and the landowner can share in the benefits (and risks) of the variability in farmland production.  It seems like this is most prevalent when the landowner had a connection to the farm operation while growing up and understands that the tenant is taking all the risk with a cash rent payment.  The other avenue, and one of the current buzz words in agriculture, is the flex lease.  Essentially and hybrid of cash rent and shared leases, it provides the landwoner with a base guaranteed return, with a chance to share in profits after the harvest is completed.

It’s important for landowners and tenants to have an open and ongoing dialogue regarding the rent.  It also benefits landowners to do their homework about rent prices (and practices) in their area to make sure they are receiving a price that is line with the market.

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2012 Indiana Rent Prices Headed Up

Thursday, September 22nd, 2011

While grain prices have cooled off recently, the ag industry is still looking to have a very healthy 2011 crop year.  Yields in many areas are much better than anticipated, and when combined with commodity prices that are still sitting at high levels, producers are figuring to come out in good shape this year.  Landlords that are looking to renew and/or renegotiate rent contracts for 2012 are looking to increase their profitability as well.  A recent article on AgWeb.com (2012 Cash Rents to Increase with Production Costs, Incomes) quoted a recent Purdue Extension study that suggests Indiana farmers could see a similar jump in rent prices as they did from last year – around 13 %.

The driving factor continues to be high grain prices.  Worldwide demand for US grains appears to be strong through at least the next 12-18 months, which should keep prices strong.  However, many farmers are going to be hit with higher input costs in 2012, mainly fuel and fertilizer.  As we saw in 2007 and 2008, the margins at $7 corn are sometimes no greater for producers than they are at $3.50 corn.

How will this affect the land market?  At most sales, farmers have been an integral component on driving sales.  While we have seen a strong demand from individual and institutional investors, it is typically the local farmer base that is one one of the biggest groups bidding on the land.  As rents and other input costs go up, their available disposable income will decrease, giving them less cash on hand to attempt to buy farmland.

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Flexible Farm Lease Agreements

Wednesday, August 24th, 2011

Most absentee landlords have a typical cash rent lease in place with their tenant – The tenant sends them a check every year and that’s all the owner has to concern himself/herself with.  With the jump that the commodity markets have taken recently, some landlords are looking at an alternative to the traditional cash rent lease in order to reap the benefits of high grain prices – flexible farm leases.

What is a flexible farm lease?  Essentially, it is similar in a lot of ways to a crop share lease in that it allows the landlord and tenant to share equally in the gains, and also the risks.  It differs from a crop share lease in that the landlord does not have any out of pocket costs for farm inputs.  With most flex leases, the final rent number is determined at harvest.  The landlord and tenant decide on a predetermined percentage that the landlord will get from the gross farm income (grain sold plus any USDA payments) and when the grain is sold the landlord receives their percentage.  Farm owners that like to be more hands-on like the flex lease option because in years with strong yields and grain prices they can outperform a cash rent lease.  However, the downside is that if yields are down, or the price for grain falls, their profit also shrinks.

Another form of the flex lease is essentially a hybrid of the flex lease described above and a cash rent lease.  In this situation, a farm owner would receive a base cash rent from the tenant and the remaining portion of the income would be determined in the same manner as above, with the landlord receiving a predetermined share of the gross farm revenues.  One quality that appeals to farm owners is the ability to really customize the flex lease, whether it be in the percentage received or the base rent.

Want to learn more about flexible leases?  Iowa State has an article titled Flexible Farm Lease Agreements which discusses the mechanics of flexible leases, along with the pros and cons, of the lease agreement.  If you are considering switching to a flexible lease situation, I would suggest doing some due diligence in all that is required with a flex lease from the landlord’s perspective before jumping in.

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Continued Optimism in the Countryside

Thursday, September 30th, 2010

We’ve talked in the past about how the demand for farmland is often a function of how confident farmers are about their future.  This phenomenon is not new or unique to agriculture. For example, the U.S. “Consumer Confidence Index” (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.  Placing a relative value on farmer attitudes, however, has been difficult until recently.  Last April, DTN & Progressive Farmer started an “Agricultural Confidence Index” that tries to capture the mood in the countryside.  They’ve just released the report from their September survey (The DTN/The Progressive Farmer Agriculture Confidence Index) and most respondents believe that their economic future is brighter than it was just 6 months ago. 

The report provides a breakdown between various geographic regions, and between the crop and livestock sectors.  It was interesting to read that nearly all the groups feel better today than they did in the spring. Higher commodity prices get most of the credit, but some think there might even be a seasonal component involved (more optimism in the fall than in the spring!).  Regardless, this report supports our belief that farmers will be active land buyers this fall and land values should move higher. Now, if we can just find a few more properties to sell!

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THE INCREASING TREND OF ABSENTEE LANDLORDS

Thursday, March 11th, 2010

Of those of you out there who cash rent land, do your landlords live in the area or do they live out of the county or even the state?  A recent article in The Progress Report takes a look at studies done by Iowa State economists on cash rent payments in Iowa and where those payments are ending up.  (Read the article, The Flow of Money From Rented Land in Iowa) Are the rent payments going to the landowner who lives across from the farm or to the one who lives halfway across the country?

What they found is that nearly a quarter of Iowa landowners who are receiving cash rent live outside the state of Iowa.  In some of the more fertile counties, such as Kossuth Co., this meant that roughly $13 million dollars left the county last year in the form of cash rent payments.  Is this a bad thing?  Not necessarily.  As society has trended towards more urban living over the last 50-60 years, it only makes sense that there are going to be less and less farmland owners that live in the area as farms are handed down through the generations.

What is important is that tenants and landlords stay in communication, whether they live 2 miles from each other or 2,000 miles.  As with anything, an open channel of communication will make doing business much easier.

I will go back to the question I initially asked.  How many of you farmers have landlords that live in another state?  What is your relationship like with them?  How about landowners that are reading this.  Do you own ground in a state other than which you live in?  Are you happy with the level of communication that you have with your tenant?  Let us know at eric@loranda.com.

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