Stop Negotiating Your Land Rents by the Acre
Mike Preiner | September 27, 2016
Pick up any farming magazine right now, and you’ll probably find several articles discussing how land rents need to drop in response to low commodity prices. Many of the articles that try to calculate how much rental prices need to drop (such as this good piece by Gary Schnitkey) tend to approach the question by assuming a particular expected yield, such as 200 bu/acre for corn. However, most fields clearly don’t have an expected yield of 200 bu/acre, so what rent should you pay for fields with different yields?
Most people would agree that you should pay more for better ground, and less for worse ground. But as we’ve helped our customers figure out what prices they should be paying for land, we’ve noticed something unexpected: most farms don’t pay more for better ground.
Let’s begin by looking at some real data. In Figure 1, we plot rental price against expected corn yields for a farm typical of those we’ve analyzed. For this analysis, it is critical to have an accurate expected yield; by this we mean the expected long term average yield of the field (obviously any given year may be higher or lower). This blog post describes some of the techniques we use to make sure we have a sound yield estimate. A couple of things immediately stand out in the plot:
- There is a wide spread of potential yield: this farm has some pretty good land, but also farms in some river bottoms that often get planted late or get drowned out
- There are typically many fields that have the exact same cash rent, even though they have significantly different yields
- There is essentially no relationship between total rent and expected yield
Figure 1. Plot of total rent vs. expected corn yield for individual fields of a representative farm. Note that a) there is a very wide spread of expected yields for fields that are at $250/acre, and b) there is a similarly wide spread of rents for fields that are 180 bu/acre of expected yield
We also analyze rents by landowner, since it is common to agree upon a single rental price with each landowner, and these agreements may include fields with both higher and lower quality ground. In Figure 2 below, we show data for the same farm, but now grouped by landowner. While this analysis removes many of the outliers (almost all fields below 140 bu/ac clearly belong to landowners that also have some better fields), there is still no correlation between price and yield.
Figure 2. Plot of total rent vs. expected corn yield for individual landowners of a representative farm.
This is data from just one farm, but many of the operations we’ve worked with exhibit similar patterns. Interestingly, some recent work shows that rental prices can be correlated with yield when aggregated at the county level, so it remains to be seen exactly at what spatial scale these correlations appear. However, it is clear that the individual farms that tend to pay more rent for better ground show at least one of these two characteristics:
- They have a high percentage of crop share agreements (because by definition a crop share creates a correlation between price and yield)
- They are explicitly analyzing how much they pay for rent on a per bushel basis
To highlight the second point, Figure 3 below shows rental costs grouped by landowner, and sorted from greatest to least in two ways, $/acre and $/bu. Let’s take one landowner to illustrate the importance of analyzing rent in $/bu: Landowner #35 looks like a pretty good deal charging only $200 per acre for his fields, but it is actually one of the worst deals when analyzed on a $/bu basis. In those fields, over $1.50/bu is going towards rent. If you factor in other costs such as direct inputs and labor, these lower yield fields becomes even less profitable compared to the others!
Figure 3. Rental costs by landowner in $/acre (upper panel) and in $/bu (lower panel) for a representative farm, arranged from greatest to least. Landowner #35 is highlighted to show how the relative ranking changes between the two views.
As a result of working with our customers analyzing field-level profitability, our team at Granular has concluded that adjusting rental rates is probably the single most important thing a farm can do to ensure profitability. Here’s where to start:
- Don’t fall into the usual agreements out of convention or habit
- Estimate yields for each field using its complete yield history
- Compare your different rental agreements by grouping landowners and sorting fields using expected $/bu
- Incorporate field-level input and labor costs to your field-level rents to understand how much room you have for negotiation
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