Cash rent blues
The current rally in grain prices puts both cash renters and cash rent landowners in a unique situation.
In most occasions in past years, a big increase in grain prices was brought about by reduced yields. That is not the situation this time. For many farmers the combination of high prices and good yields will result in a very profitable year. Landowners, understandably, will want to experience this prosperity as well.
The timing of these better prices is causing a situation in which rental agreements that are changed now will not achieve increased income for the owner until the 2008 crop. The rally did not begin until after the termination deadline date of September 1 in most states.
My knowledge of rental agreements is based on experience, not academic research. When I was farming full-time, I rented from seven land owners. I had two cash rent agreements, two 50-50 shares, two 60-40 shares where I paid all of the expenses and one 60-40 share where the owner paid some of the expenses but I stored the crop free of charge. I realize that some of my comments about cash rent will amount to swimming against the tide.
After 34 years of farming with all of these various arrangements, when I decide to rent my land to another farmer, I will do it on shares. Shares automatically adjust for yield and price variations between years. On the rare occasion when there is a windfall, like this year, I will benefit immediately with no negotiating or time delay. In the equally rare occasion when there is a crop failure, I won't have to worry about getting my rent because of a tenant going broke.
Over my years of renting, three of my landlords considered going to cash rent but decided against it. One wanted the farm expenses to balance income from other sources for tax purposes. One ran a budget and decided that the income from share rent was more than it would have been from cash rent. The third was simply emotionally attached to the land and wanted a share of the grain.
One of the farms that I cash rented was very small and not worth keeping grain production separate to figure shares. The other was owned by a retired elevator operator. Believe it or not, he had such a distaste for grain marketing he just wanted a check every year without making decisions.
There are all kinds of rental agreements that will automatically adjust for changing economic conditions. Besides shares, cash leases can be written to take account of prices and yields. To me, the key is to have a good working relationship between owner and operator. I could never understand people who see the relationship between the person who owns the land and the person who farms it as adversarial. If they don't both make money, in the long run the deal will not work.
I was fortunate that in 34 years of farming, I never lost a rental farm. None of the farms that I operated was ever sold or rented to another farmer except for one I gave up because it was a poor producer. I considered the time I spent cultivating relationships with land owners probably the most profitable hours of my business life. I was always professional in presenting invoices for their share of expenses. I used a spreadsheet in reporting production that I presented to them as soon as their crop was harvested. If marketing was part of the deal, I told them how I planned to make the sales and then did it the way I promised.