October 25, 2013

An Extension Educator Column

I’ve already had landlords and tenants, but especially tenants, contact me regarding cash rents for 2014. The questions is generally, “What should I charge (or pay) for cash rent next year?” The best answer that I can give is “It depends.” That sounds kind of like a non-answer, so let me explain.

Logically, if you look at the top rents mentioned at places of socialization, like places where people gather for coffee, it seems to me that rent should go down some. The economics just do not support $350 per acre for dryland rent, or $500 per acre for irrigated ground cash rent.

Let’s look at where the rent might be based on average yields and expected commodity price levels for 2014. For illustration and discussion, I am using eastern Nebraska data. Too many times, the landlord wants to calculate rent on the best yield and the price of about $8.00 per bushel, which is the best price of the last year. The tenants want to calculate rent on the poorest yielding year of the last 10 years and the lowest price of the last year, which might be about $3.90 per bushel. Neither point of view is fair or realistic.

I have suggested that a starting point for rent should be about 30% of the gross revenue per acre, which would be paid to the landlord. I also insist that this calculation be completed by taking an average yield times a fall 2014 price at the local elevator or grain processor. So, an average irrigated corn yield of 200 bushels per acre times an expected fall 2014 price of about $4.40 would be $880 gross revenue per acre. By multiplying that amount by 30% you arrive at a suggested rent of $264 per acre. This would be the starting point for negotiating rent for 2014.

You can see from this simple calculation, if cash rent for irrigated corn ground is less than $200 per acre, it may be appropriate for the rent to go higher. If rent is above $350 per acre, a decrease in rent seems appropriate.

Now having said that, rent will be determined by what the tenant is willing to pay and what the landlord is willing to accept. Not by a suggested calculation. True economics of a particular commodity is still determined by supply and demand. With land economics, the demand is still exceeding supply from what I am able to determine. That said, cash rents will probably still remain strong in Nebraska. So, a specific rent on a specific farm will vary. This proves why I am right with my original answer. Where will cash rent be in 2014? “It depends!”

Allan Vyhnalek
Extension Educator in Platte County