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Talking a square land rent deal

Jeff Caldwell 04/12/2011 @ 11:00am Multimedia Editor for Agriculture.com and Successful Farming magazine.

Prices for about everything tied to raising a crop these days are as volatile as they've ever been. It can make it tough for landowners and tenants to reach a square land rental agreement. So, how do you do it?

"Market volatility also may contribute to an uneasiness between landlord and tenant in setting a rental rate," says University of Nebraska Extension educator Allan Vyhnalek. "Prices are moving more in 15 minutes, than they did over an entire year when I was growing up. These wild market swings can be overwhelming and stressful."

As a general rule of thumb, regardless of the structure of the rental agreement, the most accurate figure for rent is 25% to 30% of the land's gross income or its equivalent. But, when crop prices are falling, landowners may be reluctant to follow the market down and cut rental rates.

"Cash rents are going up rapidly, 75% to 90% over the last 6 years, and will be slow to go down if/when commodity prices fall," Vyhnalek says. "When landowners get used to having that income, they are not going to want to give that up."

Though that's a natural dynamic in the farm land rental game, Vyhnalek says the best way to avoid issues that can arise from market volatility is to keep communication open, clear and ongoing. "Building a successful landlord-tenant relationship is beneficial to both parties and can lead to a fruitful long-term arrangement. Clear communication will be the key to keeping this relationship strong and cash rents at the proper level," Vyhnalek says.

Here are a few things he recommends weighing when considering such open communication between landowner and tenant:

  • Tell the truth
    Telling the landlord the yield for the field or whole farm average, then telling the coffee shop the biggest number observed on the yield monitor can lead to misunderstanding. Your credibility may be questioned.
  • Communicate expenses (tenants)
    In many cases, landlords are former farmers. Depending on how tuned in they are to current production costs, they may know how much current expenses have risen.
  • Communicate intentions and expenses (landlords)
    Landlords need to communicate too. Tenants cannot possibly know how the landlord wants the land to be managed if that information isn’t communicated. Expectations for fertility management, tillage, mowing ditches, and weed control are examples of information that should be shared. It’s also appropriate for landlords to tell tenants how much land taxes have changed.

"Many tenants may question why they need to share information about their expenses, yields, and the farming practices and choices they've made," Vyhnalek says.

And, don't forget the communication works both ways. In the typical landowner-tenant relationship, most consider the landowner the side with more questions for the tenant regarding how the land will be cared for, what will be planted, etc. But, if you're a renter, don't be afraid to ask questions of your landlord, especially if your future viability depends on it.

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A Landlord's Perspective 04/13/2011 @ 2:17pm I am a landlord in Indiana and I will be in no hurry to "come down" on cash rent. My operator is a great person and I respect him immensely. I value our long-term relationship, so I will come down slowly if it comes to that. But to be honest, I have watched year after year of RECORD farm income due to the "corn ethanol effect" but most of that upside went to the operator. Sure my rents went up and I am happy about that, but they did not go up nearly as fast as farm income -- also I did not participate in the windfalls of 2008 and 2010 as I receive a fixed cash rent. So if the operator wants most of the incremental upside, he should be willing to take most of the incremental downside too. I feel no "moral obligation" to come down in lockstep with farm income because my rent didn't go up in lockstep during good times. I completely disagree with the author that cash rents should somehow be in a percentage band of gross farm revenue. Farming is a fixed cost business, and at very high volumes (yields) and prices (or very low volumes and prices) those old rules of thumb breakdown. What I am saying is that 30 percent of gross revenue when gross revenue per acre on corn is $1,400 / acre is not at all the same as 30 percent of gross revenue on $700 / acre. At $1,400 / acre the operator is getting a certain amount of income that falls straight to the bottom line with almost no incremental cost and drives improved fixed cost absorption -- this is the part they never share on the way up. Of course that's the operators right -- he is the one in "business". But its also his problem on the way down in my opinion, its just life.

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