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Preparing for lease negotiations

By Staff | Aug 7, 2015

MELISSA O’ROURKE, an Iowa State University Extension farm management specialist, visits with members of an audience in Estherville, speaking directly to Kathy Graves, an Emmet County land owner. O’Rourke conducted land value and leasing meetings throughout northwest Iowa in July.

kschwaller@evertek.net

ESTHERVILLE – Melissa O’Rourke stood before a group of farm operators and owners, encouraging them to establish relationships.

O’Rourke, an Iowa State University Extension farm management field specialists, said relationships between renters and tenants are critical to tenants in finding and keeping land to farm.

It’s also important for landowners in finding and keeping the right tenants.

“It’s important to establish those relationships,” O’Rourke said. “Go have a cup of coffee with your land owner and get to know their families.”

“If something happens to the land owner, you will not be a stranger to their family,” O’Rourke added. “There needs to be ongoing conversations between the producer tenant and the land owner, not just when it’s time to pay the rent or when there are problems.”

She said fair cash rent is something that should benefit both entities, and said there are a few ways to calculate fair cash rent.

Estimates for a cash rental rate for cropland can be based on what others are charging or paying, average yields, CSR2 index, share of gross crop value, return on investment, crop share equivalent and tenant’s residual.

These she explained as:

  • What others charge or pay. Tenants and land owners will want to know if the farmland they have is considered high-grade, medium- or low-grade quality-and it also applies to land in oats, hay and pasture.

Pitfalls for this plan include charges for land that may not live up to the standard of production, rumors for cash rent rates may not be true, and differences in the quality of land should be taken into account when comparing a current rental rate with others’ rental rates.

  • Average yields. This plan is based on a farm’s average yields over a five- to 10-year period.

Land owners and tenants determine the average rental rate per bushel in their county for both corn and soybeans, and multiply that by the average yield for that tract of land.

  • CSR2 plan. A cash rent rate can be computed by multiplying the average CSR2 by a rental rate per CSR2 point. (For example, land with a CSR2 rating of 80 at a hypothetical county rate of $3 per point would equal $240 per acre cash rent.)
  • The “Share of Gross Crop Revenue” plan says gross crop value is the state average yield multiplied by the state average price from October through December.

Gross crop revenue includes gross crop value plus all USDA commodity program payments and crop insurance indemnity payments.

ISU information shows that cash rental rates tend to follow the gross revenue generated from the crop being produced.

Some cash rents are calculated as a percent of the gross crop value for the past 10 years.

  • Return on Investment. This plan multiplies the estimated current market value for cropland by an expected rate of return.

ISU survey information shows that cash rents for good cropland in Iowa in recent years have averaged 3 to 4 percent of current land values.

  • Crop Share Equivalent. This plan compares the rental rate to the return that would be received from a 50-50 crop-share lease, where the owner’s return is automatically adjusted by changes in yield, selling price and input amounts and prices.

Computing a cash rental rate using this method would necessitate gathering estimates of yields, selling prices and input costs for the coming year, which can be difficult to predict.

Land owners would use five-year or 10-year average yields and current prices for harvest delivery, then subtract the landowners half of the seed, fertilizer, pesticides and other shared expenses.

  • Tenant’s Residual. For this plan, calculations are done to see how much income the tenant has available for rent payments after subtracting all the tenant’s costs associated with producing the crop.

The land owner would first need to estimate yields, selling prices and other crop income received, then subtract the operating expenses. Next, he or she would need to subtract the tenant’s cost of machinery and equipment ownership-including depreciation, a return on investment, insurance and machinery housing, along with a charge for the tenant’s labor and management.

The remaining amount is available for the payment of cash rent.

Detailed information, example charts and worksheets for these plans are available on ISU Extension’s website, on the “Ag Decision Maker” page.

O’Rourke said a handshake on a cash rent settlement is not the best option for either side. She said it relies too heavily on selective memory, and that a written agreement ensures that all provisions for the leasing agreement are covered, meanings of terms are defined, and it also helps protect the relationship between the land owner and tenant.

“You would want to do it to avoid misunderstandings later,” she said. “Put a value on your relationship by protecting the things that were agreed upon.”

O’Rourke said that in making decisions on the farm, Extension’s “Farm Building Rental Rate Survey” and “Iowa Farm Custom Rate Survey” have been two of the more requested pieces of information for both tenants and land owners.

She said looking at cash rent from both sides of the table is important, and that both sides need to seek answers to the things they really need to know in order to make the right decisions for their operation.

She said beginning farmers often struggle with getting established, and that Iowa and Nebraska are two states that have some form of beginning farmer tax credit programs.

It offers land owners a chance to receive a tax break by having a beginning farmer on their land.

She said beginning farmer loan and tax credit program information can be found at USDA centers, Farm Credit Service agencies and other similar agencies.

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