“What should I pay for land rent?” This is a common question received by lenders and other ag professionals this time of year. The problem is, there’s no easy answer. Often times farmers get the response of, “it depends”.
What if there was a solution to help farmers figure out the answer to this age-old question? That would be genius, right? Well, one such solution exists – FairRent.
What is FairRent?
FairRent (https://fairrent.umn.edu) is a free web application that helps farmers evaluate land rental decisions. It can be used to evaluate cash, share, and flexible rental arrangements. The results help the producer set a realistic bidding range for cash rental negotiations. Flexible parameters can be added to evaluate risk and returns across a range of yields and prices. This information provides clarity to the land rent decision and gives farmers confidence as they work through negotiations.
FairRent can also be used by landlords to help evaluate alternative land rental arrangements from their perspective. If needed, information from AgLease101 (https://aglease101.org/) provides useful information for land rent negotiations for both parties.
What information is needed?
To do the most complete analysis, details like expected crop production and planned expenses for the coming year are needed. To start, details regarding the number of acres and base cash rent or share rental information is entered. Then direct crop expenses like seed, fertilizer, chemicals, and so on are entered on a per acre basis. Overhead expense totals are entered next. These will be allocated equally on a per acre basis in the analysis. Crop insurance details are also entered to demonstrate the risk protection available at low yields and prices. These details allow for the most complete the cash rental analysis and provide the most meaningful analysis.
FairRent provides a breakeven rental rate for all acres being analyzed. This is a weighted average of the calculated amounts remaining for rent across acres. An example of this is provided below.
Also included in the report is a maximum rent allowable to cover expenses. This shows the rental rate a farmer can pay at varying levels of expenses and varying yields and prices. This portion of the report provides the maximum rent that can be paid to cover unpaid labor and management (family living) costs to the rental rate that covers only direct expenses. In the long run, it is important that rental arrangements cover all expenses and provide adequate returns to contribute to family living needs. But, at a minimum, this report evaluates the absolute maximum cash rent bid that should be offered, which only covers direct expenses. At that rate, the operator is getting no return for labor and management and the land operated is not covering overhead expenses. But this can be used as a short-term evaluation when considering whether to keep rented acres already in the operation or if new acres should be rented.
In addition, share rental arrangements and flexible lease rental arrangements can be evaluated in a similar fashion. This analysis provides similar reports, specific to the land rental arrangement being evaluated.
Overall, FairRent is a powerful evaluation tool for considering land economics decisions. FairRent takes the emotion out of the decision, providing the producer or landlord with a detailed financial analysis to make the best management decision for their operation.