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With the 2016 harvest season all wrapped up, it is time to think ahead and start planning for the 2017 season. Mike Preiner, head of Granular Data Science, breaks down his team’s most recent land rent analysis, and shares practical tips for data-driven rent negotiation. He is joined by Justin Durdan, Managing Partner at Durdan Farms, and Christopher Lee, Director of Sales at Granular.
In this webinar, they discuss the following:

1. How to more accurately forecast yield for each of your fields and compare it to land costs

2. How to objectively evaluate each of your land agreements

3. Identify the analyses you need to run on your farm to become a more effective negotiator and improve your land rent costs

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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
stop-negotiating-rents-by-acre-pic-1
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.

stop-negotiating-rents-by-acre-pic-2
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!

stop-negotiating-rents-by-the-acre-pic-3
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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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:
Cash Rent vs Crop Share
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:
Equivalent Cash Value vs Expected Yield Graph (1)
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.

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Unless you are lucky enough to own every acre you farm, the relationships you have with your landowners are some of the most important for the health of your operation. Losing a quarter section, even if it is breakeven to grow on, can increase fixed costs on machinery and overhead for your other acres, driving you into the red. But your relationships with your landlords are solid, right? And the terms your land agreements are concise and written down?

If you cannot say yes to the second question, I would make the case that you cannot say yes to the first. You probably will be tempted to argue one of the following:
We have an understanding. While a handshake agreement can go a long way, it can also end up in a ransom-like situation. For example, in a recent Iowa legal case, an operator who agreed to “some type of bonus” to keep farming a piece of land ended up de facto changing a $195 per acre lease into a 50-50 agreement—a situation that ended in a lawsuit with a huge payment to the landlord.
We have known each other for decades. It is an uncomfortable thing to confront, but if you and your landlord have known each other for decades, odds are increasing every year that the relationship will soon pass to the next generation on one side or the other. Are your children and your landlord’s children on equally good terms? Does everyone have equal insight into what terms exist?
We are both good on our word. Whose word? Nothing kills a relationship like remembering things differently and having no way to resolve it.
It’s family. I believe this is one of the biggest reasons to write it all down. Imagine the Thanksgiving dinner referenced in another recent Iowa court case, where the daughter of one of five children who had an oral agreement to hold some family land in equal shares announced that she and her father had hired a lawyer regarding the farm. I doubt much was the same in the family thereafter.
It takes time and money. You could invest in professional tools like Granular, which allow you to analyze the profitability of your operation under each landowner agreement, but even doing some simple math using Farmdoc-provided crop budgets for 2016 can help. If you make an assumption that losing 10% of your land base means spreading out at-capacity non-land fixed costs over 10% fewer acres, a 1,600-acre operation losing a quarter section would lose between $7,000 and $18,000 as a result. What are you willing to invest to prevent that type of a loss?
To sum it up. Write it down. It is one of the simplest things you can do to keep your operation going for generations to come.

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It is no secret that crop share rents have been in long-term decline in the Midwest [1].  The reasons can be several:  In some cases, landowners have moved away from farm communities and are no longer as involved in what is going on with their land. In others, landowners may prefer a steady cash payment rather than sharing in the risk of volatile markets. Some growers have also pushed for cash rent for enterprise insurance unit eligibility reasons, and because cash agreements are often more flexible than shares, which often get stuck at crude figures like “thirds” or 50-50 splits. We see this trend play out on our customers’ farms: the average Granular grower has around seven different cash rent levels but only two different share levels.

There are factors, however, that indicate that crop shares could come back in fashion or, at least, slow their decline in popularity:

    • Government policy: under the ARC-CO program (massive winner in the program choice corn and soybean growers faced under the 2014 Farm Bill) share landlords are considered producers [2] which could allow them to participate in government payments, decreasing their exposure.

 

  • Falling commodity prices: The dollar cost of share rents has fallen dramatically with the fall in commodity prices, while cash rents have remained stable. This is exemplified in recent analysis by Gary Schnitkey at the University of Illinois, which shows share rent costs falling below cash rent costs in Illinois for multiple years in a row for the first time in over a decade [3].

In a related analysis, the figure below shows the share of expected non-irrigated corn revenue (using NASS data) that would accrue to average non-irrigated rent by county in the U.S. during three periods, 2000-2009, 2012 and 2015.  Two broad patterns pop out – the first is geographic, where the highest share of rent as a percent of revenue tends to be in places with lower risks for dryland corn crops. The second is over time – land costs as percentage of revenues have returned to or exceeded the levels of the 2000’s.  This is incenting growers to consider shifting to share rent, using the cushion of sharing in potential ARC-CO payments as a carrot for the landowner.
rents3
What are your own cash rent vs. share breakdowns and land costs? If you’re a Granular customer (with the required permissions to view financial data), you can look at map views of your crop share vs. cash rent agreements under Analyze > Granular Labs > 2015 Land Agreement Report. Even if you’re not a customer, you can visit AcreValue to browse farmland and their estimated values.

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How a Potato Grower Found 11% More Profit Using Granular

Learn how Granular helped a real farm discover that their variety choice was costing them $800 per acre

Karl Wozniak, Role
  |  
September 11, 2017

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Our Continued Committment to Independence and Data Privacy

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