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7 ways to compute cash rent
fixed cash rent
agreement is the simplest rental arrangement there is. But it is not as simple
as it first seems.
“Determining a fair rate is
not easy,” says William Edwards, Iowa State University (ISU) Extension
economist. “Cash rents are likely to be too low during periods of rising prices
and high yields, and too high during periods of declining prices and low
Here is the crux of the
“Rates often reflect the results of the past few years more than the upcoming
year,” says Edwards.
“It is always in the
tenant’s and landlord’s best interest to develop their own lease,” says ISU
Extension economist Mike Duffy. “But sometimes it is helpful to know what
practices are being followed.”
Here are seven different
methods of computing a cash rent, as put forth by Edwards and a colleague, Don
Hofstrand. Several of these methods are used throughout the country. One, using
corn suitability ratings (see #3), is peculiar to Iowa. Although the titles in
the seven-point list come from Iowa, some of the information comes from other
1. What Others Are Charging/Paying
Edwards says the most common
way to establish the amount of cash rent is to base it on what other people in
the area are charging. He lists three potential pitfalls with this approach.
• Simply charging what
others are charging may not be appropriate for a particular farm.
• Rumors about cash rental
rates may be quite different than the actual rates, especially in a rapidly
• “Differences in the
quality of land should be taken into account when comparing your rental rate to
those of others. Landlords who are unfamiliar with farming often assume that
all land is of equal productivity,” Edwards says.
Kansas State University ag
economist Kevin Dhuyvetter says, “In areas where there is sufficient cash
renting, the prevailing cash rent should provide an approximation of the
appropriate measure of fair rent. In some situations, however, there is no
established rental rate. Or if there is one, the rate has extenuating
circumstances that preclude it from being appropriate.” Those circumstances are
things like buildings on the land or rent between family members.
“Furthermore,” he adds, “publicly reported cash rental rates
often represent a relatively wide geographical region and, thus, may not
reflect local conditions.”
2. Average Yields
With this approach, a farm’s
average yields over five or 10 years are used to compute the cash rent.
Edwards gives an example of
how this method works. “Assume the average rental rates in your county are
$1.10 per bushel for corn and $3.75 per bushel for soybeans, based on the
latest survey information. If your farm has an average corn yield of 160
bushels per acre, this results in a rental rate of $176 per acre ($1.10 × 160 =
$176). An average soybean yield of 48 bushels per acre results in a rental rate
of $180 per acre ($3.75 × 48 = $180).”
You can access the average
rental rates for corn and soybeans in Iowa via a publication entitled Cash
Rental Rates for Iowa 2010 Survey
(www.extension.iastate.edu/agdm/wholefarm/pdf/c2-10.pdf). Several other states
publish this type of information as well.
According to Purdue ag
economist Craig Dobbins, the rent per bushel of estimated corn yield statewide
in Indiana ranged from $1.02 to $1.08 per bushel last year. Rent per bushel in
Indiana is usually, but not always, highest on top-quality land compared to
poor- and average-quality land.
This type of information is
usually available at websites for the ag economics departments of land-grant
3. Corn Suitability Ratings
A corn suitability rating
(CSR) is a land productivity index used in Iowa to rank soil types on a scale
of 0 (low) to 100 (high). Most fields have more than one soil type, but a
weighted average can be calculated by identifying the acres of each soil type
and the CSR rating for those soil types. The CSR values for particular tracts
can be obtained online from county assessors’ offices.
Rental rates per CSR points
are available in the publication mentioned in #2.
“A cropland cash rental rate can be computed by multiplying
the average CSR by a rental rate per CSR point,” Edwards explains.
Here’s another example from
Edwards. “Assume a typical rental rate per CSR index point of $2.30 for your
county. A tract of land with a CSR of 80 would have a rental rate of $184
($2.30 × 80 CSR = $184.) Be sure and check the actual rent-per-CSR point for
4. Share Of Gross Crop Value
According to Edwards,
“Rental rates tend to follow the gross value of crops.”
Iowa State publishes a table
that shows the average cash rent in Iowa as a percent of the gross value of
corn and soybean crops. The current table has those amounts for 2000 through
2009. It’s available in a publication entitled Computing a Cropland Cash Rental
Rate that discusses these seven methods of computing cash rent
(www.extension.iastate.edu/agdm/wholefarm/html/c2-20.html). The 2010 figures
won’t be available until this spring.
Edwards says rents have
generally averaged about 35% to 40% of the gross value of a corn crop and 45%
to 50% of the gross value of a soybean crop.
“These percentages and
estimated yields and prices for the coming year can be used to estimate a fair
cash rental rate,” he says.
5. Return On Investment
This method involves multiplying
the estimated current market value of cropland by an expected rate of return.
Surveys show that cash rents for good cropland in Iowa in recent years have
averaged about 4% to 5% of current land values.
Edwards is quick to point
out, however, that this method is “rather imprecise, especially during periods
of rapidly changing land values.”
(Iowa land values increased by 16% between November 2009 and
November 2010, according to an Iowa State University survey.)
University of Illinois ag
economist Gary Schnitkey says, “While both farmland prices and cash rents have
increased since 1987, farmland prices have increased faster than cash rents.
“In 1986,” he adds, “cash
rent as a percent of farmland price was 8.1%, the highest level between 1972
and 2010. Since 1987, cash rent as a percent of farmland price decreased,
reaching a low of 3.4% in 2008. Cash rents as a percent of farmland price
increased slightly to 3.5% in 2009 and 2010.”
Schnitkey worked from USDA
figures that are available for other states.
6. Crop Share Equivalent
This approach is a little
more complicated, and that could be a deal breaker for people who like cash
rents because of their simplicity.
The approach is to calculate
cash rent by comparing it to the potential return of a crop-share lease. (A
crop-share lease automatically adjusts for changes in grain prices, yields, and
“However,” says Edwards, “to
compute a cash rental rate using this method, estimates of yields, selling
prices, and input costs must be made for the coming year, which is sometimes
difficult to do.”
An example of how this
method works appears in the ISU publication entitled Computing a Cropland Cash
Rental Rate (see #4). This publication also has a worksheet you can use to
compute a rental rate for your situation. Or you can enter your figures into
Decision Tool: Cash Rental Rate Estimation, which is available by clicking on
the Decision Tool icon in that article.
7 Tenant’s Residual
The final method of
computing cash rent is to calculate the amount of income left for rent after the tenant has paid
all the costs incurred raising the crop.
As is the case with #6, you
first need to estimate yields, selling prices, and government payments. The
worksheet mentioned in #6 and the Decision Tool can both be used to estimate a
rental rate for this approach.
Another tool for evaluating
this approach and others is the KSU-Lease Spreadsheet from Kansas State University.
Find it here.