Country Corner
By Steve Fairchild 

Here’s a creative idea for rising cash rents

There might be some awkward conversations at the landlord’s place this year. In a landlord’s mind, the swing to high commodity prices isn’t fraught with volatility. It’s permanent. So regardless of how well you market grain, she assumes you’ve hit the top of the market and hit it consistently. And the news keeps rolling in—boom times for grain, big pay checks for farmers. I don’t mean to paint landowners as greedy, mind you. They have an asset that needs to be managed profitably. But you well know, small local bidding wars can build a larger trend.

This year is double jeopardy. What are the chances that solid prices will feed growers’ willingness to chase rental acres with more cash? Fun times are ahead.

And how do you keep your head during a cash-rent land rush? There are some interesting ideas floating around. If landlords are satisfied with the quality of their renters, there might be some opportunity to try something new.

University of Illinois Farm Management Specialist Gary Schnitkey and Ag Economist Dale Lattz have addressed the issue with flexible cash leases based on crop insurance parameters. They base the idea on the fact that landowners and farmers are both out to make the most money they can from the land asset. So they built the concept around Group Risk Income Plan crop insurance.

The formula for the rent agreement would be: expected county corn yield x base corn price x rent factor. Stu Ellis, an information specialist for the University of Illinois, boils down the details:
1) The expected county yield is set annually by USDA, based on trend yields for the county.
2) The base price is computed by USDA at the beginning of March for crop revenue insurance policies such as CRC and RA. It is determined by the performance of the DEC corn contract during the month of February.
3) The rent factor is a percentage negotiated annually between the landlord and farmer depending upon productivity of the land and risk to the operator. Farms with lower productivity relative to the county average should have lower rent factors and vice versa.

Here is the example Schnitkey and Lattz use. It’s a farm in Macon County Ill., so don’t get sticker shock from the rent rate. In 2007, the expected county corn yield in Macon County is 178.8 bushels and the base price is $4.06 per bushel. If the landlord and farmer negotiate a 0.35 rent factor, the cash rent is $254 per acre (178.8 bushel county yield x $4.06 base price x 0.35 rent factor). For the county, using a rent factor of 0.35, cash rents vary from a low of $133 in 2001 up to a high of $254 in 2007. Cash rents would have averaged $158 per acre for a 0.35 rent factor.

Ellis points out, “The primary advantages to this lease are that it reflects the changes in commodity prices, and the level of cash rent to be paid will be determined about March 1, which allows operators to use crop insurance and hedges to manage the risk of the cash-rent payment. Crop yield history is not needed, and since USDA would recognize this as a cash lease, any farm program payments would go to the operator.”

On the other hand, the farmer still shoulders yield and price risk with only the year-to-year change in commodity price figured in adjustments.

So the rent factor will remain a point of negotiation. There could still be minimum and maximum cash rents established. And you can plug different grain crops into the formula. But, as Ellis points out, March might be a little late to establish cash rent contracts.

Cash is likely to remain king, but for landowners and renters, there could be some benefit in trying something new. 

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