Farmland rent may never be average

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Countless farmland owners often ask the question, what is the average rent in my county or area? The easiest and best answer is that no one farm is average and the rental value of your parcel of land is a combination of many different factors. Within any area, there are a wide variety of situations and normally a number of production factors that should and will impact the potential value for a “fair” farmland rental value. In the Saginaw Valley region, tile drainage tops the list as one of the key factors to consider because it plays a major role in the production potential of a field. A close second on the list is the size and location of the field, with smaller parcels having lower values. The list of factors to consider can be extensive. A landowners checklist that addresses many of these factors can help farm operators determine if a parcel of land and working with the land’s owner will be beneficial to raising crops. As with most operational agreements, there is not a simple formula that provides a set rental value but rather it is a compromise between the landowner and the potential farm operator. Michigan State University Extension recommends getting a set of good terms in a written farmland rental agreement is the very best way to insure a win-win situation and provide both parties their desired outcome.

The use of a flexible farmland rental agreement is increasing in Michigan. Many farmland owners are working to share some of the risks with their land renters to have a beneficial relationship in their rental arrangement. An appealing option when using a flexible farmland rental agreement is that it allows the actual land rent to vary to better reflect the actual crop yields and market prices. In this type of agreement, the land owner receives a higher rental value in years when yields and prices are higher and a lower or minimum base rent in years when the yields and/or prices are lower. The first step in this type of agreement is establishing an open line of communication between both parties to achieve an agreement where both parties benefit.

Getting any land rental agreement in writing is very important to insure a positive outcome for both land owner and land renter.

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Harold Smith    
Story County, Iowa  |  April, 23, 2013 at 08:46 AM

When crop prices were in a bull market over the last decade, these rich farmers didn't want to sign flexible lease agreements because they didn't want to "share" the upside in crop revenue. Now that crop prices are falling, they all the sudden want flexible leases. My advice to landowners - stick with the highest fixed cash rent you can get in a bear market for crops. In a bull market for crops, look to flexible rent if you can find an operator who will work with you. Cash rents are sticky in a bear market, meaning it takes awhile for them to come down. My tenants made big money off me over the last decade. I was pretty laid back about it knowing that at some point the market would turn. If any of them come to me asking for a flexible cash rent or for an outright rent reduction in the next couple years, I am liable to get very upset. The knife cuts both ways, its the give and take of business. Uninformed landowners get hurt if they don't understand these dynamics, but the good Lord knows that the land grants universities will never tell you about it. There whole lot in life is to work for the operator it seems!

Harold Smith    
Story County, Iowa  |  April, 23, 2013 at 08:47 AM

BTW, I am no investment advisor either. The "my advice" bit, is simply an expression of opinion of what has worked on our farms shared with the group for consideration. Cheers!

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