I learned something interesting from a wheat farmer about cash rent values that makes as much sense in America’s bread basket as it does in Kentucky’s “Biscuit Basket,” where he farms. Sam Halcomb, Walnut Grove Farms, Adairville, Ky., grows corn and double-crop soft red winter wheat/soybeans.
Purdue economists think highly enough of his approach to have invited him to explain his cash rent formulas to the Purdue Top Farmer conference recently.
Halcomb calculates a field’s revenue-generating potential, then offers a landlord 25-33% of that for cash rent. He’s found over the years that 25-33% accurately reflects a point where he can profit from current market conditions, while capturing present market values to satisfy the landlord. It’s based on being a win-win for landlord and tenant through good times and bad.
Land’s revenue generating potential is affected by weather, soil productivity, markets and external factors like geopolitics, he says.
For example a two-year revenue-generating potential average of $4 corn is:
- $4 x 200 bu./acre = $800 revenue generating potential x 30% is $240
- Halcomb would bid $240 rent
- He incurs all the risk with this scenario, regardless of yield and price.
In Kentucky, on corn/double-crop wheat and soybean ground, the rent bid for that rotation is $209.
Flex lease example
Halcomb’s has a flex lease on about a third of the land he farms; a happy medium between share and cash rent. “Set a floor that both landowner and tenant feel comfortable with and guarantee the landowner no less than 28% gross revenue,” he says. “In lean years, the landowner’s floor may be more than 28%, but in a good year when price and yields are high, his floor may only be 20% of revenue, and you would pay the bonus of the extra bushels after the season plays out.”
Halcomb pegs prices for the formula on printed crop insurance prices to avoid confusion about what the market price was.
- $4 corn x 200 bushels=$800 gross revenue per acre
- 28% x $800= $224 rent
- ($200 rent floor assumed in this example)
- So, if weather and yield assumptions play out correctly, Halcomb pays the landlord $24/acre as a bonus.
When a farmer asked Halcomb why he doesn’t own more land instead of renting, Halcomb replied that his ROI is better on productivity improvements like irrigation. “I’d be sticking my neck out too far to buy land,” he said.
Don’t bet the farm
Renting land provides more annual flexibility to adjust your costs than buying land, says Purdue AG Economist Michael Boehlje. “Paying crazy prices for land when you have corn prices below $4 is positioning yourself to be wrong for years to come, and positioning your children to be wrong,” he says.
“Consider the extreme of $20,400 per acre paid recently in northwest Iowa: That figure requires $20/bushel corn price or 800 bushels per acre yield just to cover your land cost and a 4% return on your money,” Boehlje says. “That translates to $4 per bushel to cover the land price alone, without covering any variable costs.
“I don’t care that he paid cash; that is money that could have done many other productive things,” Boehlje said.