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Prairie Farmer - May 2007

Shedding Light on Rent Agreements

Garrett Stoerger
Department of Agricultural and Consumer Economics
University of Illinois at Urbana-Champaign

Commodity prices are not the only things that have changed since last fall's harvest. Newly altered price structures mean some producers will be farming their leased acres under different terms this year.

While landowners will benefit from higher prices in crop-share leases, those with cash-rent agreements have to raise rent in order to get a piece of the higher prices.

Before entering into any new lease agreements, it is important to analyze profit levels of different lease options. That said, how do you determine the ideal lease for your farm?

Fortunately, the folks at farmdoc have all the resources you need to make the best decision. The farmdoc team at the University of Illinois has developed a FAST spreadsheet that helps you analyze several different leasing arrangements and their effects on profit level.

The Farm Rent Evaluator makes quick work out of this otherwise challenging task. Using this tool, you can compare crop share, fixed cash rent, variable cash rent and custom rent leases. This spreadsheet is available for download Shedding light on rent agreements free of charge on the Farmdoc Web site, along with online demos and the full lineup of FAST tools.

As easy as 1, 2, 3

As with other FAST programs, you will be required to do some initial data entry. While that may sound painful at first, rest assured that it is a quick and easy process.

For example, the first section requires that you construct a budget — a tedious task for any farm operator. However, the tool includes a simple budget template with default budgets for every county in Illinois . In fact, if you have used the FAST Crop Budgeting Tool in the past, you will recognize many of the same inputs in the Farm Rent Evaluator.

Once you have entered your budget information, the next step allows you to decide which leases you would like to compare and set their splits. These splits show the percentage shares that landowners and tenants realize for costs and revenues. The program sets default splits at traditional levels, but you can make specific changes to custom tailor the lease to your situation. You can also import the traditional split levels for 50-50, 60-40, and two-thirds/one-third leases and fine tune levels from there.

For example, suppose you are a farmer in a traditional 50-50 crop share lease. Ordinarily, you would share inputs such as seed, chemicals and so on. If you were to renegotiate the lease so that you now paid the total seed expense, you would only need to change the input for your splits to reflect the tenant and landlord shares. The same applies for all input items and lease types.

Understanding the results

Once you have completed the budget and lease splits section, you are ready to analyze the results. The selected leases appear in columns across the top of the sheet for easy interpretation. This analysis includes both tenant and landlord returns as the initial means of comparison. Using these outputs, you can quickly assess what lease would be the most profitable on average, based on the budget you provided.

The tool interprets this data further using two additional pieces of analysis. The first piece of that analysis calculates the 30-year high and low returns based on historical information. These statistics are a tremendous resource for determining best- and worst-case scenarios for your operation. The results page also contains a sensitivity test that calculates the percent chance that revenue will fall below a user-defined level. Based on these figures, you can determine the likelihood of receiving below target revenue levels.

Also, if you have had trouble determining the level at which cash rent no longer yields a profit, we have a resource that can help. Using the Crop Budgeting Tool, you can quickly and easily build a budget (which is very similar to the one you already produced in the Farm Rent Evaluator) and be on your way to determining a breakeven level of cash rent. The amount calculated on the last line of the budget is the amount that you can afford to pay and maintain a positive level of revenue.

Farm leases play an enormous role in determining your profitability from year to year. If you are not conducting adequate analysis of your leases, you are leaving yourself susceptible to risk. The Farm Rent Evaluator provides a fast, reliable way to project revenue levels for the coming year and compare the performance of other lease arrangements.

Stoerger is the FAST Coordinator with University of Illinois Extension.