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Would you raise your own land rent?
Raise your own farm land rent? That may sound crazy, but with today's skyrocketing land values, that may be a smart thing to do if your land rental rates haven't changed in a while.
"A young neighbor came to me today and asked me a hard question. He told me he had been renting the 80 to the south of me for 5 years now and the rent had never been raised. Every year he would wait for a letter to come and nothing," says Agriculture.com Farm Business Talk veteran contributor cowfarmer. "So his question was: Should he raise it on himself? He told me he is by no means making a lot of money, as he is not a huge farmer and started from next to nothing."
Why raise your own land rent? First of all, many agree that with today's grain prices, profits likely justify paying a higher rent. "Both parties ought to make an honest dollar on the ground," says Farm Business Talk advisor Jim Meade / Iowa City. "That the rent hasn't been raised in 5 years makes me wonder if the owner is aware of the current rental market."
Raising one's own rent before the landowner does it for you, or at least offering to do so, isn't the most common practice in the world, but it's got a growing utility in today's land market, says Jerry Warner, accredited farm manager with Farmers National Company in Omaha, Nebraska. For one, the land market behaves much differently than other markets, mostly in how it's consistently risen over the last few years. If a landowner's also got a stake in other markets, keeping all the different value trends straight can be tough, especially for farm land.
"I know the landowners we talk with many times are very surprised how much rents have increased and they find it almost incomprehensible it could be that high," Warner says.
One way Warner says he's seen a lot of farmers and landowners get by in this situation is by using flexible or variable cash rent agreements. This helps the landowner share in the financial boost the farmer can glean from a surge in grain prices. But, on the other hand, the prospect of losing money is a tough one for the landowner, especially if he or she depends on the land rent for a set amount of income.
"We're recommending a lot of variable cash rents because of the unknown prices in the future. That's when feelings tend to get hurt, and one party tends to feel taken advantage of, when the market moves a long way and somebody makes or loses a lot of money," Warner says. "If the market goes up, we have provisions in there for some degree of sharing with the landowner. Typically, landowners don't like a lot of complexity and they want to know how much they're going to get, a base rent they can count on."
Warner says a "base plus variable" arrangement is a good one to ensure both the landowner and farmer are paid fairly.
But, there's no agreement that's perfect in every situation. That's why Warner says it's most important to look at specific circumstances in each landowner-tenant relationship.
"There does need to be good communication as to what's going on. I think it behooves farmers to keep their landowner informed," Warner says.
Adds Farm Business Talk advisor Jim Meade / Iowa City: "That the rent hasn't been raised in five years makes me wonder if the owner is aware of the current rental market. If she/he isn't, it might be a big shock when ever the eyes are opened. Not opening a dialogue, to me, means that when the facts of life are determined the current tenant is likely to be persona non grata for not being up front. The owner may feel ripped off, even if it is no one's fault but his/her own."
Even if raising your rental rates now doesn't feel like a good business decision on the balance sheet, it could have major implications for his ability to hang on to rented land in the future.
"Better to be proactive than to do nothing and end up getting a surprise letter telling him the land's been rented to someone else," adds Farm Business Talk senior contributor smokeyjay. "He needn't raise if by much, but should offer something. Though it may be a tough thing to do, financially, I believe in the long run this will improve his standing in the mind of the landlord."
The trend in the farm land market right now makes such flexibility and willingness to work together with the landowner on a rental rate arguably more important than ever before, Warner says. Farm incomes have been strong the last couple of years, and he says more farmers are looking to grow their farms.
"Farmers are really interested in expanding for the most part, so that makes them very competitive when a piece of land comes up to either buy or rent and many farmers are in the position to be competitive," he says. "They are optimistic about growing their operations and I guess we've seen more land on the market now than in recent months, an indicator some people view this increase as an opportunity to cash in. We also probably start to see people getting to be a little seletive with what they buy.
"Farmers I think overall are worried about commodity prices going down, just like the world economic scenario, and we all hear about it and worry about it," he adds. "Farmers are worried about next year's prices, yet very aggressive on rental terms and purchases."