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September 17, 2018
Farmland owners often believe they have few options when it comes to leasing their land each year. They have heard how the number of farmers is shrinking and then wonder if they would be able to find a new operator for their farm if they made a change in lease terms. Or, they think the only option is what their operator tells them. As in any business transaction, there normally are options in how to structure terms. And yes, owning and leasing a farm is a business.
The cash rent lease is the predominant type of arrangement in many places. It is one that has less risk for the landowner and seems simple to manage by the owner except for the negotiation of the rental amount. Conversely, this type of lease brings the most risk to the operator. But, there are other leasing options, especially in the light of the current lower farm incomes. The landowner could look at a net share lease in which they receive a set share of the crop in lieu of a cash payment. The landowner then assumes some yield and price risk, but no crop input expenses. A long-standing lease type is the 50/50 crop share lease in which production and crop input expenses are shared equally by the landowner and operator. Finally, a landowner could opt for a custom farming arrangement whereby they pay for all the inputs, pay a farmer to plant, tend, and harvest the crop, and they receive 100% of the production. In this arrangement, the owner takes all the risk but receives all the income.
In order to make an informed business decision, a landowner has to know the numbers. They should understand production costs, grain markets, and expected yields to name a few key factors in analyzing leasing options. The landowner also needs to understand the risk/reward scenario of each lease type that best suits their income needs. Finally, the landowner needs to know their farm and the local farm operators in order to match all the pieces together to have a farm lease that best serves their goals of farmland ownership. Many landowners turn to Farmers National Company to analyze leasing options to get the best rental arrangement that suits their farm financial and operational goals.
Senior Vice President - Real Estate Operations
|Category: Farm Management News|