NCFMEC-01 NORTH CENTRAL FARM MANAGEMENT

2. Variability of Crop Return – Land thatexhibits highly variable returns may haverents discounted for this quality. For example,land that is poorly drained may exhibitvariability of returns due to late plantingsfrom wet springs.3. Land Quality – Higher quality soils translateinto higher rents.4. Fertility Levels – Higher fertility levels oftenresult in higher cash rents.5. Drainage Capabilities – Better surface andsub-surface drainage of a farm often results inbetter yields and higher potential cash rent.6. Buildings and Grain Storage Availability –Access to machinery and grain storage mayenhance the value of the cropland rental rate.7. Size of Farm – Large farms typicallycommand higher average cash rent per acredue to the efficiencies gained by operators.8. Location of Farm (Including Road Access)– Proximity to prospective operators maydetermine how much operators are willingto bid for cash rents. Good road access willgenerally enhance cash rent amounts.9. Shape of Fields – Square fields with fewer“point rows” will generally translate intohigher cash rents as operators gain efficienciesfrom farming fields that are square.10. Previous Tillage Systems or Crops – Previouscrops and tillage systems that allow foran easy transition for new operators mayenhance the cash rent value.11. USDA Farm Program Measurables –Farms that participate in the USDA FarmProgram and have higher “program yields”may command higher cash rents than nonprogram farms.12. Services Provided by Operator – Operatorsthat “go the extra mile” by providing servicessuch as clearing fence rows, plowing snow inthe winter, and other services may be valuedby the landowner. This may even be a partialsubstitute for cash rent increases.13. Conditions of Lease – Conditions placed onthe lease by the landowner may result in fewerprospective operators and a lower averagecash rent.14. Payment Dates – Leases that require partor all of the rent to be paid early in the year(“up-front”) may result in lower rental ratesdue to higher borrowing or opportunity costsfor the operator.15. Reputation of Landowner/Operator –Reputations of the parties may play a partin the cash rental negotiations. A landownerthat has a reputation of being difficult towork with may see cash rents negativelyaffected by this reputation.16. Special contracts that are tied to thefarm – Farms that have special contractstied to them may restrict the operatorfrom changing crops based on marketconditions. This may negatively impactcash rents. There may also be contractsthat positively affect cash rents such ashigh value crop contracts or contracts forreceiving livestock manure.If the decision is to rent for cash, how isan equitable rental rate determined for thefarm or field in question? There are severalmethods that can be used to establish a fixedcash rent for a particular farm or field: 1)cash-rent market approach, 2) landowner’sownership cost, 3) landowner’s adjusted netshare rent approach, 4) operator’s net returnto land approach or the “the amount anoperator can afford to pay”, 5) percent of landvalue approach, 6) percent of gross revenueapproach, 7) dollars per bushel of production,and the 8) fixed bushel rent.The following discussion and worksheetexamples are related to cash renting a farm.The concepts and approaches outlinedin this publication are the same whether3

cash renting of a field or total farm is beingconsidered. In some cases, the landowner andoperator may only want to consider cash rentfor a specific crop.Cash-Rent Market ApproachThis method requires knowledge ofcash rents being paid for farms in the area.It assumes rents reflect an arm’s lengthnegotiation between an informed landownerand a knowledgeable operator. Adjustmentsshould be made for differences in theproductivity of the farm and the amount andquality of improvements.This approach has some disadvantages. Itmay be difficult to determine actual cash rentsbeing paid for comparable farms as well as anyadjustments that need to be made in the rentalrates. Other approaches may be more complex,yet better reflect a specific situation. The ratesdetermined by any method cannot deviategreatly from the prevailing market rates ifthose rates are to be seriously considered in thefinal bargaining process.Prevailing rental rates may be availablefrom surveys conducted by state Extensionspecialists or by the National AgriculturalStatistics Service (NASS). Do not assume thatinformal reports or rumors of rental rates forspecific farms are accurate or representative ofall rented land in the area.Landowner’s Ownership CostUnder this approach, the landownercalculates the cost of resource ownership fromthe property. Worksheet 1 provides an exampleof the required computations. Some points toremember in deriving these ownership costsare:Land: Land is valued at its current fairmarket value for agricultural purposes. Theinfluence of location near cities and othernonagricultural influences on value shouldbe ignored. That is, the value of land as itrelates to its productivity in crop productionis all that should be included as this is what isoffered to the operator as rent.Interest on land: The land value multipliedby an opportunity interest rate is a method ofestimating the annual land charge. A practicalstarting point for negotiating the return toland is the rent-to-value ratio in the region(cash rent divided by market value), as thisreflects the “opportunity cost” of not rentingthe land on a cash basis. Table 2 reports therent-to-value ratios for average cropland inthe various regions in the U.S. as reported byUSDA NASS. It can be seen that the rent-tovalue ratios vary considerably from region toregion. Additionally, it can be seen that theratios have been trending down in some regionsand thus using a longer term historical averagevalue may not be appropriate.Real estate taxes: The actual taxes dueannually is anothercontribution of theExample Worksheet 1. Landownership Costs as Basis for Fixed Cash Rentlandowner.Crops Grown: Corn, soybeans, wheatItemPer Acre ValueLand 4,000InterestReal Estate TaxLand ImprovementsTiling500 Surface drainageConservation practicesLimingTotal CostAcres: 150RateAnnual Charge 4 %0.5 % 5% % % % 1602025Land development: Theaverage dollars spentannually for lime,conservation practices,and other landimprovements shouldbe used.2054

landowners are sometimes reluctant to changefrom cash rent to crop-share arrangements.Other: If capital has been investedto improve land productivity, such astile drainage, then include a reasonabledepreciation allowance for this investment.This method may result in a high value,but the method does give the landowner abasis for setting the “asking price” in cash-rentnegotiations.If this method is utilized, an average netcrop share over a period of years should beused to allow for both good and bad yields.Landowners who have rented on a sharebasis in previous years are likely to know thepercentage of crop share received.This method for computing cash rentassumes the rent value should be comparableto the net return a landowner receives under acrop-share lease. Normally, fixed cash rents areexpected to be lower than net crop-share rentsince the operator incurs all price and weatherrisk. The difference represents the operator’scompensation for carrying the added risk.Worksheet 2 will help the landownerestimate what the average net-share rent hasbeen. Use yield and cost values that can berealistically expected for the current year andtypical share arrangements for the communityor area in determining the landowner’s shareof income and expenses. Other income such asUSDA payments should be added if they are apart of total gross income. No USDA income isincluded in the following example worksheet.Cash rents are not always less than cropshare rents, however. If there is a strongdemand for land in an area, cash rents mayexceed net crop-share rents. This explains whyOnce the net-share rent value has beendetermined or estimated, the landowner andoperator must decide how to adjust this valuefor price and weather risk assumed by theLandowner’s Adjusted Net-Share RentExample Worksheet 2. Converting Landowner’s Net-Share Rent to Cash Rental Rate1Landowner’s Share of Gross Crop ValueCropsCornSoybeansWheatOther Income4Totals (A)Yield per PercentAcresAcre2 of Crop7517050 %405050 %356550 %%150LandownerCropsShareCorn50 %Soybeans50 %Wheat50 %Totals (B)%Tons orBushels637510001138Price3 4.50 11.00 6.00 Landowner’s Share of Shared ExpensesFert. &Harvest/Seed3Lime3 Pesticides3Drying3 3,375 4,125 1,312 1,688500 1,160 920 400 5601,312228438 Landowner’s Crop Rent (A B)Less risk shifted to operator5Net landowner’s share rent per acreTotalValue 28,687 11,000 6,825 46,512Total Cost 10,500 2,980 2,538 16,018Per AcreValue 310.08Cost/Acre 106.79 203.2915.50187.79If whole farm leased on a cash-rent basis, list all crops grown, income and shared expenses from each cropUse average yields, allowing for both good and bad years. Incorporate trend in yields3Use current prices and costs.4USDA payments, crop stover, etc.5Example risk value is 5% of total crop receipts. This number will vary depending on the production risk in your area.125

operator. Determination of the risk value isa matter for negotiation. In the example, therisk value was set equal to 5 percent of totalcrop receipts.Worksheet 3 outlines a procedure to estimatehow much can be paid for land in the form ofcash rent.The values for labor and management maybe the most difficult to determine. The laborvalue used should reflect the amount of timeused only for crop production and general farmmaintenance. The hourly rate should equalwhat could be earned if working for otherfarmers in the area. Management is sometimesvalued at 5 to 10 percent of gross value ofcrops, or 1.5 to 2.5 percent of the investmentin land, equipment, and machinery.Operator’s Net Return to LandIn the desire to farm more land, operatorsmay at times bid more for land than theycan actually afford. Hence, operators needto carefully budget how much money willbe available to pay for the use of land aftervariable expenses, fixed costs on machinery,and a return to labor and management havebeen deducted from the gross value of crops.Example Worksheet 3. Amount of Cash Rent Operator Can Afford to Pay1CropsCornSoybeansWheatOther Income4Totals (A)CropsCornSoybeansWheatTotals (B)Gross Value ofYield perAcresAcre27517040503565Crops ProducedPrice3 4.50 11.00 6.00 Total Value 57,375 22,000 13,650 93,025Total Variable Costs3Variable Costs Total VariableAcresper Acre2Costs7534025,500 401907,600 351806,300 150 39,400Per AcreValue 620.17Per AcreValue 262.67Total Fixed Costs, Labor, and Management3Crop machinery: machinery value per acre 500.00Depreciation for 10 years50.00 Interest on average investment at 6 percent 30.00Taxes at% Insurance at .25 % 1.25(C) Total machinery fixed costs (D) Labor charge5 ( 2.0 hrs/ac @ 13 /hr) (E) Management charge ( 5.0 % of total crop values) (F) Total production costs (B C D E)(G) Amount that can be paid for rent per acre (A-F) 81.2526.0031.01400.93219.24If whole farm leased on a cash-rent basis, list all crops grown, income from each crop, and variable expenses for each crop.Use average yields, allowing for both good and bad years. Incorporate trend in yields.3Use current prices and costs. Variable costs include fuel, oil, repairs, fertilizer, herbicide, insecticide, interest on operatingcosts, custom hire, drying, insurance, and miscellaneous costs.4USDA payments, crop stover, etc.5Labor expense or charge may be included in variable expenses.126

Percent of Land ValuePercent of Gross RevenueLand ownership may be viewed asAnother method of establishing a cashjust another type of asset in a portfolio ofrental rate is to set it equal to a fixed percentinvestment alternatives. Owners would likelyof the expected gross revenue produced frombe looking for a rate of return commensuratethe rented land. This would include incomewith other types of investments, adjusted forfrom the sale of grain or forage production asdifferences in risk. Comparable investmentswell as any secondary products such as strawwould include investments of a similar holdingor stover. This method would be similar toperiod. In the case of land, longer termshare renting except the landowner would notinvestments should be used as comparisons.have a share of the crop to store and market,The landowner and the operator are exposednor pay any input costs.to different types of risk in this scenario. Thelandowner’s primary risk is the potentialfor land values to decline. The operator’sExample Worksheet 4. Percent of Land Value Approachprimary risk is the variability of yields,Crops Grown: Corn, soybeans, wheatAcres: 150market prices and cost of inputs. WorksheetPer AcreAnnual4 provides an example.ItemValueRateChargeLand4,000 Table 2 shows average cash rents as aTypicalRenttoValue 5 %percent of land value for several states overTotal Cost or Desired Return200a decade. In recent years land values have been increasing faster than rents, causingrent as a percent of value to decline. AThe expected yield can be based on actualpartial explanation for this trend is a generalyields obtained from the farm in recent years,decrease in interest rates and returns onif such information is available. Expectedalternative investments during this timeprices for major commodities can be found byperiod. The values in Table 2 do not representadjusting the relevant harvest time futuresa net return on investment – ownership costsprices for typical basis values, or checking tosuch as property taxes and upkeep of fences,see what forward contract prices are beingterraces and tile lines must be paid from theoffered by local buyers at the time the rentcash rent received.is being determined. Some products such asforages and straw are more difficult to assign amarket value to, due to less market data beingavailable.Table 2. Cropland Cash Rents as a Percent of Land Value in Selected Iowa5.9%5.9%5.8%5.4%4.7%4.3%4.2%4.0%4.3%4.3%North .3%3.1%3.0%2.8%2.4%2.1%2.4%2.4%2.5%Source: National Agricultural Statistics Service, U.S. Department of Agriculture7

Example Worksheet 5. Cash Rent Equal to a Percent of Expected Gross RevenueCropCornSoybeansWheatExpectedExpected Expected Gross Rent as % ofYieldPriceRevenue Gross Revenue170 bu. 4.50 76533 %50 bu. 11.00 55040 %65 bu. 6.00 39045 %Weighted Average:Based on Corn: 75 acres, soybeans: 40 acres, wheat: 35 acresThe appropriate percentage of the grossincome to use to establish the cash rent canbe a typical share of the crop received by thelandowner under a crop share lease in whichthe operator pays all the production costs.This share will vary by region. Worksheet 5shows an example of this approach to setting acash rent.Dollars per Bushel of ProductionThis method calculates rent based on afixed value per bushel. The rate may be basedon the dominant crop and applied to all acresor may be based on all crops produced. If thismethod uses actual yields, it would become avariable rent from year to year, as discussedin Part IV. If it is based on a constant orexpected yield, such as a productivity index,it is a fixed cash rent. This is a reasonableapproach when selling prices are relativelystable over time. It is also useful for adjustingthe rental rate for differences in productivityamong farms in a county or region.Cash RentalRate 252.45 220.00 175.55 225.85rent is negotiated is used, the rental rate isconsidered a fixed cash rent. If the actualvalue of the rental payment is based on thecurrent market value of a fixed number ofbushels after harvest, this method becomes avariable cash rental agreement, as discussedin Part III. See Worksheet 7 for an examplebased on the sample farm listed in previousexamples.Example Worksheet 7. Fixed Bushel RentCrops Grown: CornAcres: 150BushelPrice perAnnualItemRent1BushelChargeCorn56 bu. 4.50252 Based on historic rent as a percent of revenue. Based onan equitable crop share percentage (landowner paying noexpenses except land) with a discount for production risk.1What is an Equitable Cash Rent? – TheBargaining ProcessA final cash rent figure acceptable to bothoperator and landowner can be derived frommore than one of the methods outlined inthis publication. They should identify areasof agreement and differences basedExample Worksheet 6. Dollars per Bushel of Productionon the values each has independentlyCrops Grown: CornAcres: 150developed. To aid in this process, Table 2summarizes the example values derivedAveragePrice perAnnual12ItemYieldBushelChargefrom the different methods.Corn170 1.20 Certain states have a productivity rating that may be used2Based on a percent of observed historical rents1Fixed Bushel RentA fixed bushel rent would the pay thelandowner a rent based on the value of anagreed on quantity of production each year.If the expected selling price at the time the204Negotiation provides a means ofarriving at a rate that is acceptable toboth parties and is an opportunity forthem to understand each other’s point ofview. Negotiations should begin only afterthe contributions of each party are knownand information is provided on local leasingarrangements.8

Table 2. Comparison of Results When Different Approaches Are UsedCash Rent Market ApproachLandowner’s cost or desired return (Worksheet 1)Landowner’s Adjusted Net-share Rent (Worksheet 2)Operator’s Net Return to Land (Worksheet 3)Percent of Land Value (Worksheet 4)Percent of Gross Revenue (Worksheet 5)Dollar per Bushel (Worksheet 6)Fixed Bushel Rent (Worksheet 7)Both parties need to recognize thatpressing an advantage too far can result inan inequitable arrangement for one or theother. A lease that is inequitable to eitherparty is unlikely to last. An inequitable,lopsided arrangement tends to discouragegood management and cooperation from thedisadvantaged party.In addition to one-on-one negotiationbetween landowner and operator, landownershave other options for securing an operatorfarmer and determining a cash rental rate. Thelandowner should have the fundamental termsof their leases (i.e. the portions that are, fromtheir point of view, non-negotiable) in place sothat potential bidders can be aware of thoseterms and take them into consideration whenformulating their bids.Bid Process – A landowner may requestbids from targeted farmers or may openthe bid process to any and all prospectiveoperators. The landowner should includewhatever provisions he/she likes in the requestfor proposals. The landowner can evaluateeach bid on its own merits to determine thebest fit for his or her farm. There are evencommercial services that allow landowners tooffer farms for rent over the Internet.Auction Process – Farms may be offeredfor rent at a public auction, just like a landsale. Cash rent auctions are not widely used,but are a way to attract very high rents.However, the highest bidder may not be thebest operator in the long run when it comes .00252.00Your Farm to caring for the property, and it is difficult tonegotiate other conditions of the lease after anauction is held.Professional Farm Manager – Manylandowners employ a professional farmmanager as their agent. The manager willlocate an acceptable operator, negotiate therental rate, and oversee the owner’s interest inthe property. Management firms may conductsealed bid auctions to attract favorable rentalrates. Landowners who live far from their farmand/or who have little knowledge of rentalrates and customs will benefit the most fromemploying a professional manager.Negotiating Rental Payment TimingThe time and method of payment for therent should be established in advance andrecorded in the lease. Local customs for thetiming of lease payments vary widely. Somelandowners require part or all of the rent tobe paid in advance (when the lease begins) inorder to reduce the risk that the operator maybe financially unable to pay the rent later.Others may allow the rent to be paid in severalinstallments or after the crop is harvested.The payment stream should be adjusted tofit the operator’s income flow as well as thelandowner’s need for cash to cover expenses.The timing of the rental payments shouldbe considered when setting the rental rate. Forexample, if a 200 rental payment is requiredto be made 8 months prior to harvest, andthe operator is paying a 6% annual interest9

rate (0.5% per month) on borrowed o

Worksheets 18 Cash Farm Lease i. 1 PART I Should You Be Using a Fixed Cash-Rent Arrangement? Landowners and operators can choose from several types of rental arrangements. In addition to cash ren