Are You Negotiating Farm Rent in $75 Increments?
As farmers look for ways to be profitable with current crop prices, many are showing a renewed interest in crop share agreements as a way to better manage land costs. While there is a wide range of custom land agreement options (bonuses, crop sharing, input cost sharing, to name a few), it is still very easy to fall into an “one-size-fits-all” agreement based on rules of thumb or historical conventions. And these fallbacks may not be favorable to the farmer’s bottom line.
In crop share agreements, the landowner receives a portion of the crop to sell themselves. It is quite common to see a lot of agreements that use standard percentages of the crop going to the landowner. The most common percentages are 33% or 25% – you rarely see other percentages in between. While those may be traditional values for crop share agreements, it is worth examining the numbers a bit more to understand the value that farmers could be potentially leaving on the table when they just rely on a common agreement.
Let’s look at the tradeoffs between a cash rent and crop share agreement on a piece of land with an expected average yield of 220 bushels per acre under two separate share levels:
The difference in the expected cash values between these two agreements is $72 per acre – that’s not insignificant, and it suggests that there are plenty of in-between percentages that may be a better fit – there may be some fields for which you could afford those $72, but for some you wouldn’t.
To show how this can apply to any piece of ground, we’ve plotted the equivalent expected cash rent as a function of expected yield:
Figure 1. Equivalent cash rent as a function of expected yield. We highlight the equivalent cash rent for a field that has an expected yield of 220 bu/acre.
Note the analysis above works as an initial approximation, a more sophisticated expert would say that the $300/acre of cash rent wouldn’t exactly be equivalent to a 33% crop share for that same field, since the landowner is actually taking on quite a bit more risk compared to the cash rent situation, and therefore should demand higher compensation. That is a complicated topic that we’ll save for another blog post, but for now, just remember that when you’re negotiating crop shares, you should run the numbers to see what percentages make sense for each field. Don’t fall into the “33% or 25%” habit, it can cost you more than you expect.
August 2016 Notation: The analysis above does not reflect input cost sharing, which we will discuss in a later post.