Many Variables In Deciding ‘Best’ Land Lease Agreements

“The best deal for the farmer, and the best deal for the landowner.”

That should be the ultimate objective of land leasing agreements, but it’s far from that cut and dried.

Many variables play into the land leasing equation, likely first and foremost, peoples’ widely varied philosophies of just what is the “best.”

Kevin Dhuyvetter
Kevin Dhuyvetter

“Folks always want the ‘going rates,’ and currently people are asking ‘how are these high land values affecting cash rents?’” according to Kevin V. Dhuyvetter, professor and Extension agricultural economist in the Department of Agricultural Economics at Kansas State University, Manhattan.

Speaking to a packed auditorium for the 580 WIBW Farm Profit Conference in Valley Falls, Dhuyvetter said, “Over the years, the majority of land leasing questions have not changed. Each party wonders what will be the impact of adopting new technologies, such as what inputs should be shared.”

There are concerns about cash rent amounts, and “non- traditional’ leases such as net-share rent, flexible-rent, and bushel-rent. Terminating leases always are a difficult subject for both parties as well, Dhuyvetter indicated.

Traditional leases of crop land include crop-share where the landowner and renter share income and some expenses. Dhuyvetter explained that in net-share leases, both parties share the income, but not the expenses.  Fixed cash rent is also common.

“Hybrid” lease arrangements were also reviewed. Dhuyvetter said they include fixed cash rent with bonus; combination of cash rent and share; cash rent with flex on price; cash rent with flex on yield; and cash rent with flex on revenue, for example yield times prices.

A Power-Point slide indicated the distribution of lease by types in nine regions of Kansas. In northeast Kansas, 48.7 percent are cash rent, with 42.4 share leases and 8.9 percent “other.”

Statewide, 35.7 percent of land leases are cash, with 55.7 percent share leases, and 8.6 “other.”

“Crop share is a very common lease type in Kansas, but the trend is for more cash rent,” Dhuyvetter emphasized.

“Producers tend to share-lease land from the same landowner for a relatively long time, but cash leases tend to be for fewer years,” added Dhuyvetter, then questioned: “Why is this? Are long-term relationship good or bad?”

Kevin V. Dhuyvetter, right, professor and Extension agricultural economist in the Department of Agricultural Economics at Kansas State University, Manhattan, talked to 580 WIBW Farm Director Kelly Lenz before speaking to a packed auditorium at the 580 WIBW Farm Profit Conference in Valley Falls.
Kevin V. Dhuyvetter, right, professor and Extension agricultural economist in the Department of Agricultural Economics at Kansas State University, Manhattan, talked to 580 WIBW Farm Director Kelly Lenz before speaking to a packed auditorium at the 580 WIBW Farm Profit Conference in Valley Falls.

Leaving the audience to ponder, he continued to discuss methods of determining terms of a crop lease. “The short answer is ‘the market.’ That is the producers, which are the ‘demand,’ negotiating with landowners, which are the ‘supply,’” Dhuyvetter said.

Examples of non-irrigated crop-share arrangements in eastern and northeast Kansas were shown. “There are extreme  variables in what the landowners pay of fertilizer, herbicide and insecticide costs in relation to receiving one-third, 40 percent or one-half of the wheat, corn and soybean crop production,” Dhuyvetter showed.

For corn, perhaps the most grown crop today in the eastern one-half of the state, landowners paid higher percentage of the production costs with higher percentage of crop received, sometimes up to 100 percent of fertilizer costs.

Showing numbers from the United States Department of Agriculture’s National Agricultural Statistics Service, Dhuyvetter revealed that cropland value in Kansas increased 19 percent to $2,100 in 2013, and cash rent paid to landlords also up went.

“Irrigated cropland cash rent averaged $137 per acre in 2013, an increase of $18. Dry land cropland rent averaged up slightly to $53 an acre. Pasture rented for cash average $17.50 an acre statewide, up $1 from the previous year,” Dhuyvetter said.

Technically, the speaker admitted: “While landowners and tenants, meaning the ‘market,’ ultimately determine terms of leases, we use economic theory and the equitable concept to arrive at a starting point for negotiations, and to better understand the market.”

Equitable share rent means that the income for landowner and renter is shared in the same proportion as the contribution of total inputs.

“However, in traditional share rent agreements, income and shared expenses, if any, are shared in the same proportion, as has been done in the past. Share rent based on tradition may, or may not, be equitable,” Dhuyvetter stressed.

“Traditional is often not equitable in the long run, especially when markets are changing,” he added.

Five basic principles were recommended for a good crop share lease. Yield increase inputs should be shared. Share arrangements should be reviewed and adjusted if needed as technology changes. Total returns should be divided in the same proportion as resources are contributed.

“There should be compensation for unused long-term investments at the termination of a lease agreement. The key to this all is good landlord and tenant communications,” Dhuyvetter stated.

Numerous good reasons for cash rent were noted. “But, landowners and producers need to recognize the land tends to change hands more often, and relative risks change,” Dhuyvetter admitted.

Producers may be inclined to pay a higher rent with cash lease than crop share for several reasons.

“There can be lower costs because of being easier to manage the operation, including timing of when rates are negotiated. Production flexibility is increased, and farmers can manage their risk with crop insurance. It is an easier method for expansion,” the speaker summarized.

Landowners are often generations and geographically removed from their land and unaware of current farming technology. Frequently, they are older and view the arrangement with a tenant as a long-term commitment handed down from their parents.

“They might think that farming is a low-income business, and want to do their part in aiding it. Often, it’s believed there are few potential tenants, and they are beholden to the existing tenant,” Dhuyvetter said.

“Sometimes tenants take advantage of these situations unintentionally such as being poor managers, and even intentionally, because the landowner never asked to raise the rent,” the economist contended.

“Only occasionally do we see a landowner shafting a tenant,” he added emphatically.

“Many of these points are the result of the fact that a number of landowners are landowners ‘by inheritance,’ as opposed to investing in land intentionally. Thus, returns are often viewed as ‘money I never had before’ as opposed to ‘what I expect from my investment,’” Dhuyvetter clarified.

Cash rent auctions are being used in some parts of the country and have been conducted on occasion in Kansas. The economist predicted increased cash rent auctions for the future.

“Regardless of the size of your operation, treat it like a business,” Dhuyvetter suggested.

“The more you treat your family farm like a business and less like a family operation, the more likely you’ll have a family farm to pass on to future generations,”  Dhuyvetter concluded.

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