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Purdue expert shares tips for figuring cash rents

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Written Tuesday, September 30, 2008  

With prices and input costs fluctuating, people need to review their lease arrangements and adjust for the year ahead, said a Purdue University agricultural economist.

"Determining a fixed cash rent in the current environment is a difficult task and will likely require multiple discussions between landlords and tenants," said Craig Dobbins, Purdue Extension farm lease and business arrangements specialist. "It's a matter of being able to put yourself in the other's shoes and understanding the kinds of costs and risks that are being taken by all parties involved.

"As long as people keep communicating with each other, they will eventually find a number that is agreeable and equitable. You just have to keep talking and try to understand the other person's perspective. However an agreement is not reached in all cases, and the land sometimes changes hands."

Many factors influence the amount of cash rent that is paid, Dobbins said. These factors include land productivity, drainage capability and the condition of existing tiles, soil fertility, condition of existing facilities, expected crop returns and typical cash rent for the area. Other things to consider include the reputation or previous experiences between the landlord and the tenant; unpaid services provided by the tenant, such as mowing or spraying ditches, maintaining fence rows, repairing tile, maintaining lanes or roads on the farm; and the location and size of the farm, as well as the field's shape and size.

The more information that is known about a farm, the more precise one can be when trying to determine a reasonable cash rent, he said. A couple of different methods can be used to determine the cash rent.

"One method requires the landowner to know quite a bit of information about the property, like what the yields have been in the past," Dobbins said. "This will help determine the farm's productivity level."

This method also includes estimating next year's prices, as well as production costs. Dobbins recommends using the futures market as a guide to estimate next year's crop prices.

"If you add up the revenues and subtract the cost estimates, which should include operating costs such as fertilizer, seed, chemicals, as well as labor and machinery overhead, you are left with an estimate of the amount of money remaining for the land," Dobbins said. "Economists like to think about land as being the residual claimant, so it gets what's leftover after everything else has been paid. This is one way to arrive at an estimate of what one can afford to pay for a cash rent."

For landlords that don't have access to that much information, simpler methods are used to determine a cash rent, such as collecting information from surveys, Dobbins said.

The U.S. Department of Agriculture conducts an annual survey of cash rents for the state of Indiana and that information is available at http://usda.mannlib.cornell.edu/usda/current/AgriLandVa/AgriLandVa-08-04-2008.pdf . Purdue's Department of Agricultural Economics also conducts an annual land values and cash rents survey, which is available at http://www.agecon.purdue.edu/extension/pubs/paer/2008/august/dobbins.asp .

"Using survey data doesn't require as much information as trying to estimate what the returns are going to be, so this is an approach used by many," Dobbins said. "The surveys provide a general sense of the direction cash rents are going, as well as the level that rents are at in broad general geographical areas."

He also said people can use the first method to try and calculate the cash rent and then compare that number to a survey.

"If you end up with a number similar to what the survey shows, you can feel pretty good that it's a reasonable number," Dobbins said.

Another approach is to talk with other local landowners whose farms are of similar productivity and find out what their cash rent agreements are.

"If you want to know what the market would provide, there is always the option to put your farm up for bids," Dobbins said. "This could generate more interest than you want, but is probably the most precise way of knowing what the market is willing to provide for your particular property."

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