Roy Smith: Rethinking rent rates
I finished the last of my corn sales for the 2009 crop on July 1 as I had told farmers at my winter marketing meetings I would. I caught 33 cents of the most recent price improvement by waiting until the last day before making the sale.
If corn prices continue to rally following the government reports of the last two weeks, selling on July 1 instead of continuing to hold will look like a mistake. The decision was made and the bins are now empty so that repairs and upgrades can be made before they are needed this fall. As of now our 2010 crop in Cass County looks very good with the exception of about 10 acres on the Missouri River bottom which was under water for most of June. I have been farming in that area long enough that losing some crops from flooding does not surprise me.
When sales of the previous year's crops are finished, I total up the returns to see how I did for the year's crop income. One thing I like to do is look at the returns on rented ground to see if I made any money for the owners of the land I rent. I thought that last year's income for the landlords would be very good because of the excellent corn yields. What I discovered was surprising.
When I was farming full time I rented a total of eight farms besides what Sharon and I own. I had numerous types of lease agreements. It all depended on what the landlord's goals were. After I retired I continued to farm only one of the rented farms. It is the farm that was owned by Sharon's parents while they were alive. Sharon and her sisters inherited it following her Mother's death. It is now in a limited partnership owned by Sharon and her two sisters. Sharon is the general partner, meaning she takes care of the business and makes the decisions.
When we were setting up the business following the estate settlement, we discussed the possible rental agreements. Some suggested cash rent because of the simplicity of the business process. When I made that proposal to Sharon, she was adamant in rejecting the idea because she wanted a share of the crop. We finally settled on a 60:40 share rent with the operator paying all of the production costs except for crop insurance. I had been renting from her father since 1968 with that type of agreement and it had worked well over a period of more than 30 years.
It is a small farm of 60 acres of crop land. It is highly productive for this area with an APH yield of 140.5 for corn and 49.1 for soybeans. It has a rotation base with corn planted on odd years and soybeans on even years. The corn crop with higher production expenses tends to favor the owner. The return from soybeans tends to favor the operator. Over the long haul the returns average out. There has not been a low income year since 1995 on the farm.
When I began farming the land for the partnership, I was paying cash rent of $100 per acre on adjoining land. Share rent income compared favorably with that rental rate. I compared returns for the last five crop years to see how the income from the crop share would have compared to cash rent. In 2005 and 2006 the crop shares were $127.76 and $118.53. These would have compared favorable to the cash rent rates in this area at the time. However, the situation changed dramatically after that. For the 2007 corn crop the shares were $309.12 per acre. This was the result of a very good corn crop which was sold for a very high price. The returns were down to $232.26 for the 2008 soybean crop and $248.51 for the 2009 corn crop.
The returns for the most recent three years were dramatically above any cash rents paid in this area. One parcel of land recently rented for the 2011 and 2012 crop years for over $200 per acre. This has left farmers puzzled as to how such a high rent could be justified. Comparing that cash rate to the return on the farm I rent, the $200 does not look so high. I am not saying that rate is correct, just that it can be justified when compared to share rents for the prior two years. It assumes that the prices for 2008 and 2009 will remain at a comparable level for the two years in question. That may or may not happen. If is does not, our shares will again automatically compensate for the change.
My wife is very good at making financial decisions. She and her sisters have clearly done very well with their small piece of investment property. While other farmers and their land owners are sparring back and forth to figure out a fair rate on cash rented land, they are enjoying the benefits of having the income automatically adjust to changing prices and yields. They do not have to look forward to higher rents next year because they benefitted from last year's exceptional corn crop and for a portion of the 2008 soybeans sold for more than $11 per bushel.
I am still the operator on the land Sharon and I own. When the time comes to park the planter and call it quits, you can bet that I will still want my share of the crop as rent. Our succession plan calls for the farm to be rented on a share basis for as long as possible. I am fortunate in having a spouse and children that are quite capable of making good management decisions.