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JenREES 12-15-19

The past few weeks I’ve had several questions regarding cash rents/leases. My colleague Allan Vyhnalek wrote an article addressing several of these questions, so sharing some of his thoughts. You can read his full article here: https://go.unl.edu/qxt7.

“What should I rent my ground for? (How do I calculate a fair rental rate?): Land rent can be based on several things. Rental rates of the local area, percentage return on investment, survey data showing rental rates, percent of gross income, and many others. The recommendation is to calculate the estimated rental rate based on three or four of these calculations and then decide.

  1. The local rental rate might be obtained from an ag loan officer at your local bank, by ag real estate professionals, or from professional farm managers.
  2. To calculate a percent return on investment, multiply the value of the land by the percent return that you’d like to receive. Be sure to factor in expenses such as land taxes when making this calculation.
  3. Land Value Surveys:
    UNL land value survey: https://agecon.unl.edu/realestate/2019-farm-real-estate-report
    Nebraska Ag Statistics Service (NASS) survey: https://www.nass.usda.gov/Statistics_by_State/Nebraska/Publications/County_Estimates/19NEcashrents.pdf
  4. The percent of gross income is calculated by taking the average yield of the commodity grown multiplied by the expected price for that commodity which equals the gross income per acre. The landlord would typically receive about 30% of the gross income calculation; however, the number will change based on yield and price. The percentage should represent an average across 5 or more years.

The bottom line on rental rate is that it will be what the renter agrees to pay and the landlord agrees to accept. Pricing will also be based on supply and demand of farmland rental ground in the area. There is no right or wrong definitive rental price. The final rent is simply an agreement between parties involved. Typically this constitutes a fair and equitable trade price for the use of the ground.

Is a Crop Share Lease still a valid lease? Yes, it is still a fair lease. It is probably the fairest lease that you can have. In periods of commodity price stability, the cash lease gained popularity because the landlords didn’t like to pay for their part of the expenses and most didn’t care to have to market their share of the crop. A crop share lease indicates your willingness to share the risk of farming. Crop Share leases share the risk between landlord and tenant. Cash leases put all risk of production on the tenant solely.

What is the Most Common Share Lease Used? There is no share lease that is more or less correct or appropriate for one situation or another. The distribution of the share (50/50, 60/40. Etc.) depends largely on the agreement between the land owner and the tenant. In some cases, the agreed to distribution in the lease, is 60% tenant and 40% landowner; in other cases the distribution depends on the final inputs, for example, the tenant would pay all seed and chemical, and landowner paying all land and drying. Your final distribution will depend on your expectations and the agreement with the tenant.”

Farm Real Estate Resources:  https://cropwatch.unl.edu/economics/realestate
Fillable Lease Templates: https://aglease101.org/DocLib/default.aspx
Flexible Cash Lease Calculator: https://farm.unl.edu/cash-rent-flex-calc

Landlord/Tenant Cash Rent Workshops: These three-hour workshops will cover: agricultural finance and the real estate market; current trends in ag finance across Nebraska; negotiation skills for effectively managing land leases; current considerations on lease provisions; and strategic farmland succession and communications. There is no charge and please RSVP to the Extension Office in the county you wish to participate. Closest locations to this area will be: Jan. 7, 1:30 p.m., Extension Office in Seward; Jan. 8, 9 a.m., 4-H Building in York; and Jan. 15, 1 p.m., Fairgrounds in Clay Center.

Ag and Flex Lease Workshop

Cash lease questions are continually one of the top questions I answer in the office.  We’d encourage landlords, tenants, and spouses to attend this or a workshop near you to hear the most updated information for the coming year!

agleaseworkshop

Updated Cash Lease Considerations

Landlord/tenant workshops have occurred throughout the State and I hope you had the opportunity to attend one of them. Survey numbers fromAl Vyhnalek, UNL Extension Educator teaching at the Landlord-tenant lease workshops UNL and USDA (click on 2012 County Level Cash Rents) are available for starting points even though basing lease arrangements off the productivity of the land may be fairer. A 50/50 share lease is still the fairest lease arrangement yet I realize for a number of reasons many landlords are switching to cash rent. I also realize we continue to see situations of very high cash rent numbers. These numbers aren’t the norm and they don’t pencil out when cost of production is factored in.

In this post I wrote about considering cash rent based on the productivity of the land and provided a formula for it. Essentially take a 5 year Olympic average yield for the field.  Multiply by an agreed price such as fall harvest price or whatever both parties agree upon.  Then multiply by 1/3 and it gives you an idea of where to start. The price can be adjusted from there depending on if the tenant provides additional services, etc. Granted this formula isn’t perfect because a high average yield with a very high price can result in the high cash rents we’re hearing.  It’s another formula to consider.

A flexible cash lease is another way to arrive at a cash rent price. These leases can be as simple or complicated as you would like to make them. Flexes can be made for yield alone but we wouldn’t recommend flexing on price alone.  If you consider flexing on price, you should consider a combination with price and yield.

Communication is Key!

For both landlords and tenants: communication is key. I’m always amazed how many landlords tell me they don’t know the yields their tenants are receiving. If you don’t think your tenant will provide that every year by just asking for it, then build it into the written lease.  Landlords, if there are things you want tenants to do like keeping the sprayer boom away from your plum bushes that you like to pick for jam or mow your ditches a certain way, you need to communicate those things to your tenant and/or build those things into the lease as well. Building all these unmentioned things into a written lease also greatly helps family members understand why things are done a certain way when the family member who is the landlord is no longer able to take care of these things.

Landlords: while you hear high crop prices, many of your tenants did not sell $8 corn; most sold at some price along the way.

Tenants: it is important to be fair with your landlords. In good years consider giving them a share of the profit-that’s another reason to consider flexible cash leases because these things can be built in to be fair to the landlord in good years and to the tenant in bad years.

Cornhusker Economics Conference

The Cornhusker Economics Conference will focus on the ag outlook and management decisions for farmers and ranchers at Clay Center on February 29th at the Clay County Activities Building at the Clay County Fairgrounds.  The program will run from 10:00 a.m.-2:30 p.m. with registration beginning at 9:30 a.m.  The conference will cover key topics affecting farm management and production decisions for 2012. It is offered by UNL Extension and the UNL Department of Agricultural Economics and is sponsored in part by funding from the Nebraska Soybean Board. 

Dan O’Brien of Kansas State University will share his insight on grain and oilseed outlook and risk management decisions in today’s uncertain markets. While market volatility shows the need for sound hedging strategies, concerns about futures market performance and the recent MF Global bankruptcy affecting hedge margin accounts raise questions about the best path ahead for managing market risk. O’Brien will bring his experience and analysis of futures market performance to bear on the issues and discuss implications for producer decisions.

Shane Ellis, livestock marketing specialist at Iowa State University, will discuss the outlook for livestock markets and producer profitability. With outlook for meat demand and continued reductions in cattle supplies, the market fundamentals look strong, but must weigh against grain supplies and feed prices. Ellis will bring his expertise to the situation and provide guidance for producer marketing and production decisions in 2012.

The land market has also been moving in the past year and UNL Extension Educator Allan Vyhnalek will use his local knowledge and analysis to discuss land markets and leasing arrangements with implications for producer decisions.  The closing session will feature a focus on agricultural policy and the direction for new farm programs. Brad Lubben, policy specialist, will discuss the policy outlook in Washington and the major policy developments that could affect agriculture in 2011. Then, Lubben will team with UNL Extension educators to discuss specific directions for the new farm bill and implications for farm programs, conservation programs, and risk management decisions.

There is a $25 registration fee to cover programming expenses for speakers, materials, and the noon meal.  Please RSVP to Jenny Rees at the Clay County Extension Office at (402) 762-3644 or jrees2@unl.edu by Feb. 27 so we can obtain a meal count.  Hope to see you at the excellent conference!

Cash Rent Questions

Cash rent questions continue to be the primary question I receive and it’s been hard for me to keep sharing numbers based on the UNL or USDA surveys as I question how useful the surveys alone really are.  I caught up with Al Vyhnalek, Extension Educator in Platte Co. during the crop production clinics.  Al’s specialty is risk management.  He shared the following with me which may be helpful to you as well.  This isn’t research-based or based on surveys; it’s based on land productivity and yield potential.  But it’s another potential tool to reach a starting point for cash rent considerations.  The numbers discussed below assume the landlord owns the irrigation equipment.

“Farmers and landowners alike want to know what they should offer or charge for farmland next year.  The question is simple, while the answer is more complicated.  There is no formula or equation available that will definitively provide an objective value for farm or pasture land.  The caller wants to know what the UNL or USDA survey of cash rental rates says to help them determine the correct starting point for discussing cash rent for the following year.  While I am glad to provide that information and do provide that information, I am more uncomfortable than ever in providing that information.  Why am I not feeling good about that?  Because the price of cash rent for a piece of farm ground should be based on the productivity of the ground.  It is important to think about the value being tied to yield potential. 

One quick way to do the calculation of productivity is to take the last 5 year average corn and/ or soybean yields for the farm you are renting times the local elevator price for 2012.  This calculation equals the estimated gross income per acre.  Take that number multiplied by 25-30% for corn or 30-33% for soybeans with the lower percentages for dry land crops and the higher ones for irrigated acres.  It gets you to a starting point for that cash rent negotiation.  Many want to set rent based on the 2011 high price of about $7.00 per bushel, but that price has never been available for the 2012 crop.  Using the 2012 fall elevator price is more realistic of what might happen next year.  Using this information as a starting point and combining it with the information from the surveys will help with fair negotiations of the cash lease.  The example percentages were determined by working through UNL budgets when determining cost/acre.

As an example – 200 bushel irrigated corn times $5 per bushel (2012 harvest price) is $1,000 gross per acre.  30% of 1000 is $300 per acre (corn acres).  Soybeans:  60 bushel beans times $11 per bushel is $660 times 33% is $220 per acre – landlord’s share.  If we have 1/2 acres beans and 1/2 acres corn then average the two rent numbers – or $260 per acre average for the farm.  That is how I think we should arrive at a discussion point for cash rents in the upcoming year based on productivity.”  For more information, please contact Allan Vyhnalek, 402-563-4901 or e-mail AVYHNALEK2@unl.edu.

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