Friday, March 11, 2011
Cash Rent Leases: What Value Do You Place On Integrity?
Cash leases can create heartburn. Operators don’t want to have to pay more than is necessary, but may shell out amounts that prevent any profit on some farmland just to keep the land. On the other hand, if the land owner does not force the issue, why suggest that you pay more to farm his or her land? Cash rents can be too low and cash rents can be too high. Calculating an agreeable amount can be done based on yields and prices, but how much value do you assign to integrity?
Fifteen years ago when I traveled the countryside speaking about production contracts, one of the main points in the presentation was that whomever wrote the contract made it fair for himself. The same can be said for cash rent agreements, unless there is a joint effort to reach an agreeable conclusion. The integrity factor is important to University of Nebraska economist Bruce Johnson, who writes in the current issue of Cornhusker Economics that our leasing culture works well most of the time because there is an element of trust and responsibility that leads to fair, win-win situations. But he says it is critical that such relationships continue, and it is important for parties on both sides of the lease to ensure they are keeping up with the market.
Johnson provided some typical vignettes about landowners. One was a widow in a retirement home whose cash rent had not increased for quite some time, and he eventually agreed to add a few dollars but the rate would still be well under that of neighboring farms. Other was an out of state landowner who heard reports of high cash rents, and he wanted the same rate to be paid regardless of the features of the farm he owned. Another was a retired farm owner who was renting out his family farm and did not want the current operator to have to pay too much, even though it was at bargain basement rates. A fourth example was that of a young farm operator who rented a farm at an equitable rate, and paid the owner a premium at the end of the year because he wanted to share the bounty of his crop. Johnson said all of the examples were real life, but recommended some considerations for “sound and ethical leasing.”
1) Operators should keep landowners informed about their farm, good points, bad points, crop progress, and how the harvest turned out.
2) Land owners should not rely on rumors about cash rental rates. Most rumors are about high rates, and can be frequently misquoted which creates financial havoc in a community of farmers. Such rumors are not a reflection of the true market.
3) The current year may turn out to be a good income year for operators based on commodity prices and input costs that have not risen as quickly as commodity prices. Some cash rents may have been negotiated before prices reached near record highs, and while operators have no legal obligation to pay higher rents than negotiated, Johnson says such a step “can do much to establish a mutually-beneficial leasing relationship for years to come.”
4) While volatility may be taking market prices upward, volatility can also taken them down, and land owners need to beware that rents may have to decrease just as often as they increase.
5) Cash rents that are well below typical rates for the area may not have been aligned for some time and Johnson says this is the time to do it by using the benefits provided by the market. He says that wide variations are hard to reconcile at one time, but it may be easier to do it now than wait, because in a future year the dichotomy may be wider.
6) Johnson says the land owner should give due consideration to the land stewardship efforts of the operator, who may be farming rented ground just as carefully as his own land. High priced land needs a steward and owners should recognize who is providing that service.
Johnson says farming is the work of all concerned, including land owners living some distance away, but the gentlemen’s agreements of prior years have given way to formal leases that properly set out the requirements and expectations of both owner and operator. And he says that necessitates an agreement that is current and in writing.
Summary:
Cash rents are a major dynamic integrated into the control of land resources required in agriculture. While they all have a financial value, a non-denominated element is the integrity of the relationship between the owner and the operator. The integrity of the cash rent lease is a shared responsibility that leads to a fair agreement.
Posted by Stu Ellis on 03/11 at 12:00 AM | Permalink
Comments
Posted by: Kay Smyth at January 18, 2012 1:01AM
I think that if cash rent leases this would make a big question on what value do you place on integrity.I know that many farm land owners are interested about this topic. I am also interested to hear more about cash rent leases.