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Get proactive on rent

Agriculture.com Staff 02/08/2007 @ 8:40am

There's euphoria in the Heartland this winter as growers prepare to plant what many believe will be their most valuable corn crop since at least the mid-'90s and maybe their most valuable crop ever.

But over half of this year's corn crop will be grown on rented land. And this could turn out to be a winter of discontent for landowners who rent their farms for cash. Many of those cash rental agreements were carried over from last season or entered into before commodity prices surged in the fall.

"Tough luck," you say? You have a valid point, but do you really want to have a disgruntled landlord who is suddenly more receptive to other offers for 2008? A lot of farms got new operators in 1973 and after the new farm bill in 1996.

Howard Doster, a retired Purdue University ag economist who now consults privately with landowners and tenants, says, "Landlords and tenants are confused now and will be fighting over new rents for 2008."

He says it might be in tenants' best interests, long term, to make preemptive strikes now and find ways to sweeten the deal for landowners in 2007. It has happened before. One farmer he knows voluntarily paid an extra $20 an acre in 1996. "However," Doster cautions, "a gift or variable cash rent could cause FSA to say the landowner has a participating lease. Check the consequences with your FSA office.

"Now is an ideal opportunity to nurture a relationship with your landowners," he says. "Unless you've already priced your 2007 crop at a low level, you appear to have a windfall gain in 2007. You have the opportunity to offer to create a new lease. I'd like tenants to consider sharing some of their windfall. That increases their opportunity for having a relationship lease rather than having to negotiate, compete, and fight for a transaction rental agreement each year."

Preliminary 2007 Purdue Corn/Soybean Farm Budgets show projected resource returns at $268 per acre. (Resource returns are for use of machinery, labor/management, and land.) That's $117 more than the 2006 budget of $151. (But Doster thinks Indiana rent in 2006 was higher than most farmers could have continued paying before grain prices increased.)

Doster says most rental agreements start going out of date the minute they are signed. One way to keep rental agreements current is to use a lease that includes adjustments for grain prices (expected and actual), costs, yields, and government payments. He designed and uses just such a lease on his Ohio farm.

"I've had an outside-the-farm gate adjustor lease since 1997," Doster says. The landowner shares in all the risks and rewards outside the farm gate, and the tenant gets all the return from his or her performance.

"It's great to not have to argue or renegotiate each year," says Doster.

There's euphoria in the Heartland this winter as growers prepare to plant what many believe will be their most valuable corn crop since at least the mid-'90s and maybe their most valuable crop ever.

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