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A disconnect between land values and farm rental rates is growing. Couple that with unprecedented market volatility, and the result is an increasingly difficult environment for analyzing or negotiating farm leases, according to a leading K-State ag economist.
Increased use of cash rent versus crop share arrangements adds further complications, according to Kevin Dhuyvetter, a professor and farm management specialist.
“At one time, Northwest Kansas had less cash rent on non-irrigated cropland than anywhere else in the state, which makes sense because there’s a high level of weather-related risk,” he notes. “Today, there’s more cash rent there than in any part of the state. That’s because a few people started doing it, and it snowballed.”
Farmers run the risk of losing farmland if they aren’t willing to change, he said, but they do need to make sure the new arrangements are equitable. He discussed the issue during a series of K-State Ag Profitability Conferences held across the state.
Cash rents offer benefits for both parties, but landowners and tenants still need a way to adequately share costs, risks and returns, Dhuyvetter says.
Cash rents simplify paperwork and owner-tenant communication while minimizing risk for retired landowners living on a fixed income. But in places where cash rents predominate, rental arrangements also turn over quicker: they are more transparent and more competitive, Dhuyvetter observes.
When profit margins suddenly disappear, they can quickly plow a tenant under.
“Market volatility kills us under fixed cash rents,” he says.
Recent years have provided a perfect illustration of the impact of market volatility. In 2008, Dhuyvetter got calls from landowners hearing about skyrocketing grain prices who wanted to remove their tenants. The market reversal was swift. The following year, in 2009, Dhuyvetter got calls for the first time in his career from farmers so discouraged they wanted to throw up their hands and walk away from their leases for good.
“Prices had dropped by half,” he says.
So while cash rents are the trend, they need to be tweaked to allow for an equitable distribution of returns similar to the way crop-share arrangements work, Dhuyvetter says.
What he calls “flexible cash rents” typically set a floor price but require tenants to pay a bonus if profits suddenly surge, as they did in some cases, briefly, back in 2008. In such cases, Dhuyvetter also recommends tenants build in a “risk return” factor — he suggests using 5 percent — for sharing the potential upside while assuming all of the downside risk.
From there, the farmer and the landlord create a formula that takes into account key inputs and returns and decide in advance how to divvy then up.
“All the numbers are negotiated,” he says. “That’s why it gets hard.”
Ongoing negotiation and willingness to make adjustments are important. Dhuyvetter says he sometimes comes across farmers who have had the same rental arrangement for the last 20 years or more.
“Negotiation isn’t a one time thing,” he told his audience. “Tenants are concerned that if they increase the cash rent they’ll never be able to lower it. But no one should have a rental agreement that is fixed for 10 years. The average rent has fallen one out of every four years in Kansas. They do come down.”
Setting up some kind of flexible cash rent allows for year-to-year fluctuation in rental rates without requiring a complete renegotiation every time, he says.
He recommends running the numbers to compare a cash rental outcome to what would have happened under a cost-share arrangement and making sure the risk-return tradeoff is adequate.
In Central Kansas, where more farmers are switching to crop rotations and growing more soybeans, Dhuyvetter was asked about who should pay the tech fees and how to handle double cropping.
Dhuyvetter said in his experience about half the time landlords and tenants split the tech fees 50-50. That’s the arrangement he prefers, saying that in some situations farmers will double-crop beans on owned land but refuse to do it on rented farms because the cost of seed is price prohibitive. Another method for balancing out returns is to share a bonus with the landlord in years when a second crop is harvested.
“You shouldn’t be doing two different things (on land you own versus land you rent),” he says. “That indicates to me there is something wrong with the way the rental agreement is set up.”
Not surprisingly, rental income as a percentage of the land’s total value has been trending down for decades, even as land values continue to climb. Annual returns on owning land put it on par with investing in the stock market, at least until recently. In the last five years, land values have been growing at close to 8 percent a year, with pasture jumping 12 percent in one year alone in Kansas. “That’s tremendous,” Dhuyvetter says.
But as everyone knows, those returns aren’t tied to what can be made by actually farming the land.
“A big chunk of that is not cash rent,” Dhuyvetter points out. Rents were once calculated at about 6 percent of land returns. Today that number is closer to 4 percent, he said.
The culprit is nonagricultural investment, which tends to work against fulltime farmers seeking access by renting or buying.
“For 40 percent of principal operators, farming is not their primary business,” Dhuyvetter says. “If I’m trying to make a living full time on the farm, I’m competing with those who have another source of income.”
A disconnect between land values and farm rental rates is growing. Couple that with unprecedented market volatility, and the result is an increasingly difficult environment for analyzing or negotiating farm leases, according to a leading K-State ag economist.
Increased use of cash rent versus crop share arrangements adds further complications, according to Kevin Dhuyvetter, a professor and farm management specialist.
“At one time, Northwest Kansas had less cash rent on non-irrigated cropland than anywhere else in the state, which makes sense because there’s a high level of weather-related risk,” he notes. “Today, there’s more cash rent there than in any part of the state. That’s because a few people started doing it, and it snowballed.”
Farmers run the risk of losing farmland if they aren’t willing to change, he said, but they do need to make sure the new arrangements are equitable. He discussed the issue during a series of K-State Ag Profitability Conferences held across the state.
Cash rents offer benefits for both parties, but landowners and tenants still need a way to adequately share costs, risks and returns, Dhuyvetter says.
Cash rents simplify paperwork and owner-tenant communication while minimizing risk for retired landowners living on a fixed income. But in places where cash rents predominate, rental arrangements also turn over quicker: they are more transparent and more competitive, Dhuyvetter observes.
When profit margins suddenly disappear, they can quickly plow a tenant under.
“Market volatility kills us under fixed cash rents,” he says.
Recent years have provided a perfect illustration of the impact of market volatility. In 2008, Dhuyvetter got calls from landowners hearing about skyrocketing grain prices who wanted to remove their tenants. The market reversal was swift. The following year, in 2009, Dhuyvetter got calls for the first time in his career from farmers so discouraged they wanted to throw up their hands and walk away from their leases for good.
“Prices had dropped by half,” he says.
So while cash rents are the trend, they need to be tweaked to allow for an equitable distribution of returns similar to the way crop-share arrangements work, Dhuyvetter says.
What he calls “flexible cash rents” typically set a floor price but require tenants to pay a bonus if profits suddenly surge, as they did in some cases, briefly, back in 2008. In such cases, Dhuyvetter also recommends tenants build in a “risk return” factor — he suggests using 5 percent — for sharing the potential upside while assuming all of the downside risk.
From there, the farmer and the landlord create a formula that takes into account key inputs and returns and decide in advance how to divvy then up.
“All the numbers are negotiated,” he says. “That’s why it gets hard.”
Ongoing negotiation and willingness to make adjustments are important. Dhuyvetter says he sometimes comes across farmers who have had the same rental arrangement for the last 20 years or more.
“Negotiation isn’t a one time thing,” he told his audience. “Tenants are concerned that if they increase the cash rent they’ll never be able to lower it. But no one should have a rental agreement that is fixed for 10 years. The average rent has fallen one out of every four years in Kansas. They do come down.”
Setting up some kind of flexible cash rent allows for year-to-year fluctuation in rental rates without requiring a complete renegotiation every time, he says.
He recommends running the numbers to compare a cash rental outcome to what would have happened under a cost-share arrangement and making sure the risk-return tradeoff is adequate.
In Central Kansas, where more farmers are switching to crop rotations and growing more soybeans, Dhuyvetter was asked about who should pay the tech fees and how to handle double cropping.
Dhuyvetter said in his experience about half the time landlords and tenants split the tech fees 50-50. That’s the arrangement he prefers, saying that in some situations farmers will double-crop beans on owned land but refuse to do it on rented farms because the cost of seed is price prohibitive. Another method for balancing out returns is to share a bonus with the landlord in years when a second crop is harvested.
“You shouldn’t be doing two different things (on land you own versus land you rent),” he says. “That indicates to me there is something wrong with the way the rental agreement is set up.”
Not surprisingly, rental income as a percentage of the land’s total value has been trending down for decades, even as land values continue to climb. Annual returns on owning land put it on par with investing in the stock market, at least until recently. In the last five years, land values have been growing at close to 8 percent a year, with pasture jumping 12 percent in one year alone in Kansas. “That’s tremendous,” Dhuyvetter says.
But as everyone knows, those returns aren’t tied to what can be made by actually farming the land.
“A big chunk of that is not cash rent,” Dhuyvetter points out. Rents were once calculated at about 6 percent of land returns. Today that number is closer to 4 percent, he said.
The culprit is nonagricultural investment, which tends to work against fulltime farmers seeking access by renting or buying.
“For 40 percent of principal operators, farming is not their primary business,” Dhuyvetter says. “If I’m trying to make a living full time on the farm, I’m competing with those who have another source of income.”
