Know Your Numbers When Making Cash Rent Decisions

Finance First

With cash rent rising, you'll want to look at financials first

Published on: March 5, 2013

The past couple weeks, I've been talking about some ways you can create and foster good working relationships with your landlords. With the amount of U.S. farmland that's going to change hands over the next 20 years, it's important to have proactive conversations with your landlords to discuss what's going to happen in those transitions.

Another hot topic related to rented ground and landlords is the cost of cash rent. Statistics from NASS show cash rent numbers rising over the past five years. In Illinois, the state average for cash rent paid per acre jumped from $184 an acre in 2011 to $212 last year. That was almost double the increase from the year before.

Patterns across the Midwest are similar. In Iowa, the cash rent average per acre shot up to $252 an acre in 2012, from $214 in 2011. And in Nebraska, the state average for irrigated land was $216 an acre in 2012.

The trend is definitely upward – at a steep rate. Higher average farm income and commodity prices contribute to higher land values – which results in rising cash rents in most areas.

With the higher input costs and volatile markets we're seeing, we need to think carefully about what we're paying for cash rent before signing the lease. It can be tough to determine what we should really be paying. A financial analysis can help with that by showing what you can afford and how it will impact your bottom line.

If you're thinking about signing a multi-year cash rent lease, make sure you've projected out several years – and look at several different scenarios at various commodity price levels. No one knows what will be in store for the 2013 growing season, and we know we can't control the weather. But we can choose to take control of what we can control – like what we will and won't pay for cash rent.

Look at your numbers. When a new rental opportunity comes up, view it through the lens of your operation's financials. A feasibility study that shows you different scenarios with commodity prices and input costs can help you weigh the benefits and downsides of a particular level of cash rent.

With your current cash rent agreements, keep the lines of communication open – and keep the rental agreements fair. As I've been saying, a strong relationship with your landlords is important. That can help keep expectations clear on both sides of the contract.