A Look at Renting Farmland
The conventional belief is that a landowner has the power in land lease negotiations with a tenant, but that isn’t true, according to two Kansans familiar both from an academic view and a practical farmer leasing land view.
“Who has more power in negotiating a lease?” asked Kevin Dhuyvetter, Kansas State University professor, Department of Economics. “The reason that most people say the landlord is because of the golden rule. ‘He who has the gold makes the rules.’ You got the land; I need it; you’ve got the power. That is the typical thought process.
But Terry Kastens, Kansas State University emeritus professor and major farming operator, piped in by saying, “We are here to argue that the tenant has the power. If you think about it, you know that the tenant has the power.”
He pointed to the fact that landowners are often generations or geographically far away from the farms they own. “They aren’t aware of what is going on at the farm. Some are old and easy to take advantage of.”
The other advantage to the tenant farmer is that he has the best information about the land and the cost of farming, Kastens said. Greed motivates more farmers than landowners, in his opinion. Most tenants would prefer to keep the economics and how they are farming a landowner’s land to themselves so that they can try to make a killing earning an income when commodity prices fluctuate dramatically higher.
FIT FOR FARM MANAGERS
The opinions shared by Dhuyvetter and Kastens during an educational session at the Ag Connect Expo and Summit earlier this year, showed the option for someone to oversee the operation of a landlord’s land—someone who knows farming and the economics occurring—although neither mentioned professional farm management as an option.
Some of a farm manager’s responsibilities are to assure that the land’s fertility if being maintained, that the land is being improved and environmental stewardship is occurring. The speakers spoke in terms of these being a tenant’s responsibilities.
What Dhuyvetter and Kastens recommended farm tenants do is what farm managers assure is done—share the cropping systems being used on the land, the yields being produced, the soil fertility and the economics of renting land compared to the norms for the specific soil type and quality.
FAIR RETURN ON LAND
Landowners would like a fair return on their real estate and that isn’t always a cash rent or crop share situation. “We see more cash rent everywhere today than 20, 30 or 40 years ago,” said Dhuyvetter. “But non-traditional leases are increasing, and increasing very rapidly in some places.”
It is not that easy to establish a flexible, non-traditional rent, between a landowner who isn’t highly knowledgeable and a new tenant, the two speakers suggested. But they didn’t recommend a farm management firm be engaged.
Most landowners and tenants like cash rent because of its simplicity, but this form of rent does not allow for huge risk by the tenant, and it doesn’t allow for an upside to the landlord should the ag economics drastically change for the better.
Finding a new tenant every year is not costless and requires a lot of time. Keeping up with what is going on at the farm is important for the landlord. Too many times without someone overseeing things, either or both the tenant and landlord become complacent, Dhuyvetter said. Complacency often takes the form of not communicating.
Not communicating is one of the reasons that landlords without farm managers feel in the dark as to the value of their land for rent. And without any feeling of partnership with a tenant, a spreading tendency is to put land up for a cash rent auction.
Dhuyvetter said, “Cash rent auctions are typically the way for landowners who don’t have enough information to level the playing field.”