Based on the number of calls and questions, this column needs to talk about cash rents for 2016. Probably the summary statement for my thoughts is pretty simple. What will be paid and what should be paid might be very different numbers. The rest of the column will address this issue.
The inherit issue with cash rents is that they just don’t adjust fast enough in times of volatility. From 2006 to 2013, they simply didn’t go up fast enough to adjust with the increasing commodity prices. Since 2014, they are not going down fast enough to adjust to today’s commodity prices.
Crop Share rents weathered the storm much more fairly for all parties. Mostly because with the crop share, the risk associated with price or production is shared by both the landlord and the tenant. However, the traditional 60-40 or 50-50 rents are not as popular because landlords didn’t want to pay for their share of the input costs and/or didn’t want to worry about marketing their share of the crop.
Back to where rents should be for this year. If we were utilizing a crop share and not paying input expenses, we would have about a 30-70 split of the crop with 30% going to the landlord. So, what I’ve recommended for several years is that when you are calculating where the cash rent should be, the landlord should get 30% of the gross on a per acre basis.
Let’s do an example calculation. If Irrigated corn average yield is 210 bushels per acre and the expected price for corn this fall is $3.50 per bushel, then the expected cash rent would be 210 times 3.5 which is $735 total gross income per acre. Thirty percent of that number is $220.50. So I’m saying that the rent for 2016 based on this estimation could be $220 per acre.
Rent is ultimately determined by the law of supply and demand. As I talk to the neighborhoods in Platte County, the demand still exceeds supply. Will we likely be able to get most rents down to $220? Probably not.
As I visit with landlords, the one thing that they fear is that “If I take a lower rent, and corn or soybeans prices rise, I’m stuck. Just like I got stuck back in 2010-2013.” One suggestion that I have is to build a provision into the lease that helps the landlord with a ‘bonus’ rent check if corn or soybean prices climb to above ‘xx’ dollars per bushel. I don’t have the space in this column to explain how that would be done. Contact me if you want more information about how to set up this type of bonus.
Ultimately, the decision on the right rental rate for this next year is and should be based on the number that the landlord and tenant agree to, not what I have suggested in a column. I want rents to be in a place where the tenant can afford to take care of the land properly with fertilization and other management techniques so we leave the land resource in good shape. My fear is that with high rents, we will have tenants that would consider ‘mining’ the land for a while hoping that the price of commodities go back up.
Again, call or stop in to visit about your questions, I am more than happy to help. I will be out doing Pesticide Trainings and other meetings over the next month, so call ahead to find out when I am around.
Announcement: No-Till Cover Crop Seminar on January 29th. Call by January 27th to reserve your space for that meeting. For more information or assistance, please contact Allan Vyhnalek, Extension Educator, Nebraska Extension in Platte County. Phone: 402-563-4901 or e-mail firstname.lastname@example.org