Dairy Excel: Establishing a fair fixed cash rental rate may not be as easy as thought

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Ultimately, supply and demand of cropland for rent will determine the cash rental rate for each parcel. The expected return from producing crops on a farm parcel is the overriding factor in determining the demand for a farm and is the primary driver in establishing a fair rental rate.

Local supply and demand of cropland will be the primary driver of cash rental rates. Many of the following factors contribute to the expected crop return and the supply and demand of cropland.

Other factors listed affect potential rental negotiations in different ways.

• Expected Crop Return: Rent will vary based on expected crop return. The higher the expected return the higher the rent will tend to be.

• Variability of Crop Return: Land that exhibits highly variable returns may have rents discounted for this quality. For example, land that is poorly drained may exhibit variability of returns due to late plantings from wet springs.

• Land Quality: Higher quality soils translate into higher rents.

• Fertility Levels: Higher fertility levels often result in higher cash rents.

• Drainage Capabilities: Better surface and sub-surface drainage of a farm often results in better yields and higher potential cash rent.

• Buildings and Grain Storage Availability: Access to machinery and grain storage may enhance the value of the cropland rental rate.

• Size of Farm: Large farms typically command higher average cash rent per acre due to the efficiencies gained by operators.

• Location of Farm (Including Road Access): Proximity to prospective operators may determine how much operators are willing to bid for cash rents. Good road access will generally enhance cash rent amounts.

• Shape of Fields: Square fields with fewer “point rows” will generally translate into higher cash rents as operators gain efficiencies from farming fields that are square.

• Previous Tillage Systems or Crops: Previous crops and tillage systems that allow for an easy transition for new operators may enhance the cash rent value.

• USDA Farm Program Measurables: Farms that participate in the USDA Farm Program and have higher “program yields” may command higher cash rents than non-program farms.

• Services Provided by Operator: Operators that “go the extra mile” by providing services such as clearing fence rows, plowing snow in the winter, and other services may be valued by the landowner. This may even be a partial substitute for cash rent increases.

• Conditions of Lease: Conditions placed on the lease by the landowner may result in fewer prospective operators and a lower average cash rent.

• Payment Dates: Leases that require part or all of the rent to be paid early in the year (“up-front”) may result in lower rental rates due to higher borrowing or opportunity costs for the operator.

• Reputation of Landowner/Operator: Reputations of the parties may play a part in the cash rental negotiations. A landowner that has a reputation of being difficult to work with may see cash rents negatively affected by this reputation.

• Special contracts that are tied to the farm: Farms that have special contracts tied to them may restrict the operator from changing crops based on market conditions. This may negatively impact cash rents. There may also be contracts that positively affect cash rents such as high value crop contracts or contracts for receiving livestock manure.

If the decision is to rent for cash, how is a fair rental rate determined for the farm or field in question?

There are several methods that can be used to establish a fixed cash rent for a particular farm or field: (1) cash-rent market approach, (2) landowner’s ownership cost or desired-return approach, (3) landowner’s adjusted net-share rent approach, (4) operator’s net return to land approach or the “the amount an operator can afford to pay”, (5) percent of land value approach, (6) percent of gross revenue approach, (7) dollars per bushel of production, and the (8) fixed bushel rent.

For more information on these methods, contact me at ward.8@osu.edu

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About the Author

(Barry Ward is the leader of production business management in the Ohio State University Extension’s department of agricultural, environmental and development economics.) More Stories by Barry Ward

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