With small grain harvest season winding down across many parts of the region, some farmers may already be thinking about taking on more land next season through rental agreements. However, with the price of cash rental agreements at an all-time high, farmers will want to carefully consider how those agreements fit into their overall operation, according to advisors from Farm Credit Services (FCS).
“Cash rents are one of the most expensive and largest expenditures you will encounter,” said Brett Gloy of FCS in a recent webinar. “They can vary a lot and change rapidly, so it’s important to consider the data.”
Gloy shared that cash rental rates for farmland are at an all-time high at over $300 an acre in 2023, but it’s important to keep that figure in perspective.
“People have this perspective that rental rates only go up, but we had rates peak in the mid-2000s and then back off for a decade,” he said. “There is a lot of uncertainty out there and commodity prices are lower now than they were six months ago, but the prices of some inputs like fertilizer are also falling.”
Gloy said it’s important to look at cash rents relative to the crop the land will produce.
“We have to look at rents relative to the crop,” he said. “The per bushel rent is not as high now as it was at the 2012 peak. Then we were seeing less than two bushels and acre, but the per acre trend has increased to 10 or 15 bushels per acre now.”
In the 1990s, Gloy noted that rent was as high as 45 percent of the expected revenue.
“When we look at rent today, it is not artificially high at this point,” he said. “As challenging as it is now, lower commodity prices will put some pressure on rents.”
When considering rental agreements, FCS advisor David Widmar said considering how a cash rental property fits into the overall operation is important.
“Do some observation of what you are doing now,” he said. “What have you been doing with your rental agreements? What’s the percentage of your budgeted revenue? What are your operation’s strengths?”
If trying to land a rental agreement, Widmar said focusing on one marketing point is key.
“There are basically three ways to market: by price, performance, or experience,” he said. “We see these strategies in other marketplaces, from grocery stores to amusement parks. Amusement parks either market on having the best rollercoasters (performance), package ticket prices (price), or great customer service (experience). In marketing an operation for a cash rental, maybe we offer the highest price, but it could also be about agreeing to help with fences or mowing ditches, which would be a performance strategy. We could also take watermelons to all our landlords or pay cash rents up front at the beginning of the year – that would be an experience strategy.”
Considering a possible cash rental agreement should also include the reality of “the devil is in the details,” according to financial services officer Jeff Burr.
“It’s important to consider an agreement from different angles,” he said. “If it wasn’t cash rent, but it was a share crop or a bushel per acre arrangement, what would that look like? Doing this brings out some ground truthing because cash rent is the riskiest.”
Also, while adding ground may be appealing for various reasons, increasing acreage can also create new pressures on an operation.
“We have to look at the impact of capital and labor. If we are maxed out at our capacity on our combine and adding land means we have to get another or take on more labor expenses, than what does that do to our fixed cost? If I’m not maxed out, then it could help me spread the cost across more acres.”
Other items to look at are if the agreement includes both irrigated and dryland land or if dryland is a different price. Also, the rental history of the property is worth consideration.
“If there have been 10 tenants in 15 years, that might be telling you something,” Burr said. “In the end, be deliberate but open-minded and do your homework. There is a lot to these decisions.”
