Time to try flexible rent
I’ve read a lot about land rental arrangements over the past three weeks while working on leasing stories for this issue. In fact, it’s about the only thing I’ve read except newspapers, Christmas cards, and The Economist. The more I read and talk to people about rent, the more relieved I am that I don’t cash-rent any farmland.
Computing an equitable cash rent is difficult enough when the ag economy is tranquil. But the past four to five years have been anything but tranquil. With the volatility in grain prices, land values, input costs, and in some areas (like where I farm in south-central Iowa) yields, it’s like trying to put a jigsaw puzzle together without having all the pieces. How do you arrive at a dollar figure for cash rent with all this volatility?
Rented land is an integral part of most farm operations, and cash rent has become the norm in many areas. But volatile commodity markets and fluctuating input costs have greatly increased the risk that tenants bear with fixed cash rent. Economic theory holds that tenants paying cash rent rather than operating under a crop share agreement should earn a premium for taking on the additional financial risk. But evidence suggests they don’t. Nick Paulson, a University of Illinois ag economist, says, “Lower returns have been linked to Illinois farms that cash-rent a significant portion of their total acreage.”
Cash rents always lag changes in the marketplace. Arguably, they didn’t increase fast enough in 2007 and 2008 when commodity prices increased dramatically. (That’s why some tenants made bonus payments to landowners or voluntarily renegotiated rental agreements.) And they probably didn’t drop fast enough or far enough in late 2008 or early 2009 when commodity prices fell and input costs skyrocketed.
It’s hard to really know what rental rates are doing this winter, following the sharp run-up in corn and soybean prices since last summer. Many observers expect to see some double-digit increases, even though grain prices showed signs of stalling at the end of the year before getting another boost from the USDA’s January 12 supply and demand estimates. And there are reports of tenants who offered to boost the rent for agreements signed before grain prices really took off.
The volatility in grain prices and input costs wouldn’t be as much of a problem if tenants and landowners went back to using crop share agreements. But I don’t see that happening. And to be fair, there are a lot of drawbacks to crop share leasing, too.