| Updated February, 2008 |  |
 |
 |
File C2-20 |
|
 |
|||||
Computing a Cropland Cash Rental Rate
Don Hofstrand, value-added agriculture specialist, co-director Ag Marketing Resource Center, 641-423-0844, dhof@iastate.edu, William Edwards, extension economist, 515-294-6161, wedwards@iastate.edu
| Use this decision tool to compare different methods of computing Cropland Cash Rent. |
| For more information on determing rental rates, listen to the voiced media presentation available here. |
Cash rent lease agreements are popular because the lease is simple, the rent is fixed, and the owner is relieved of making operating and marketing decisions. Likewise, the tenant has maximum freedom to plan and develop the cropping and livestock programs. The risk and returns from changing prices, yields and costs are all borne by the tenant.
Types of Cash Rent
A farm may be rented for a fixed amount per acre for all acres in the farm (e.g. 160 acres in a quarter section) regardless of the number or acres of cropland, pasture, buildings or waste. This is referred to as a whole-farm rental rate. Or, the farm may be rented for a fixed amount per cropland acre (e.g. 145 acres of cropland in a 160 acre farm) with a separate rental rate for any pasture or buildings.
Normally whole farm rental rates are lower than cropland rental rates because the land that is not cropped is often of lower productivity or not used. Exceptions are building sites and grain storage facilities.
Approaches for Determining a Rental Rate
Determining a fair rate is not easy. Cash rents are likely to be too low during periods of rising prices and high yields and too high during periods of declining prices and low yields. Rates often reflect the results of the past few years more than those for the upcoming year.
An estimated cash rental rate for cropland can be based on:
- what others are charging or paying
- average yields
- corn suitability ratings (CSR index)
- share of gross crop value
- return on investment
- crop share equivalent
- tenant’s residual
What Others are Charging or Paying
The most common method of establishing a cash rent is to set a rate similar to what other people in the area are charging. Information File Farmland Cash Rental Rates, shows typical rental rates reported for high, medium, and low quality cropland in each county in Iowa.
This method assumes that what others are charging is fair and equitable. A landowner receiving less rent per acre than the neighbors feels that he/she is not receiving what is rightfully due. However, a landowner receiving more than a neighbor may feel that he/she is being unfair to the tenant.
There are three potential pitfalls with this approach:
- Charging what others are charging may not be appropriate for a particular farm. Remember that most other tenants and landowners are in the same position you are. They are looking for someone to tell them what rental rate is fair and equitable. If you use this method, compare your rate to many other rates instead of just one.
- Rumors about cash rental rates may be quite different than the actual rates, especially in a rapidly changing market.
- Differences in the quality of land should be taken into account when comparing your rental rate to those of others. Landlords who are unfamiliar with farming often assume all land is of equal productivity. So, when using this method, be sure to compare your rate to rates for land of comparable quality, based on actual yields or productivity indices.
Average Yields
A cash rental rate can be based on a farm’s average yields over the past 5 or 10 years. For example, assume the average rental rates in your county are $1.02 per bushel for corn and $3.30 per bushel for soybeans, based on the latest survey information. If your farm has an average corn yield of 160 bu. per acre, this results in a rental rate of $163 ($1.02 x 160 bu. = $163) per acre. An average soybean yield of 50 bushels per acre results in a rental rate of $165 ($3.30 x 50 bu. = $165) per acre.
Information File Farmland Cash Rental Rates, shows rental rates per bushel of corn and soybeans by county. Remember, use a long-term average yield (both good and bad years), and don’t just pick out the good years.
Corn Suitability Ratings
Corn Suitability Rating (CSR) is a farmland productivity index. CSR values range from 0 to 100, with higher numbers indicating higher land productivity. Each soil type in Iowa has a CSR index rating. By identifying the soil types and acres of each soil type in a tract of land, a weighted average CSR rating can be computed for the tract. CSR values for a particular tract of land can be obtained from the county assessor’s office. Remember to include only the land suitable for row crop production in the estimate.
A cropland cash rental rate can be computed by multiplying the average CSR by a rental rate per CSR point. For example, assume a typical rental rate per CSR index point of $2.00 for your county. A tract of land with a CSR of 75 would have a rental rate of $150 ($2.00 × 75 CSR = $150) per acre. Information File Farmland Cash Rental Rates, shows typical rental rates per CSR index point by county.
Share of Gross Crop Value
Cash rental rates tend to follow the gross value of the crops being produced. The table below shows average cash rents in Iowa as a percent of the gross value of corn and soybeans in recent years. The higher of the harvest cash market price or the USDA loan rate each year was used to compute the gross crop value. This includes potential income from loan deficiency payments or marketing loans, but not direct or counter-cyclical payments. Rents have generally averaged about 35 to 40 percent of gross crop value from corn and 45 to 50 percent of gross crop value from soybeans. These percentages and estimated yields and prices for the coming year can be used to estimate a fair cash rental rate.
Return on Investment
Another method is to multiply the estimated current market value for cropland by an expected rate of return. Surveys show that cash rents for good cropland in Iowa in recent years have averaged about 5 to 6 percent of current land values.
Land value $3,000 $4,000
Rate of return 4-5% 4-5%
Rental rate $120-$150 $160-$200
Estimates of current land market values are available in Information Files Farmland Value Survey - Iowa State University and Farmland Value Survey - Realtor’s Land Institute, or on the Iowa State University Extension Land Value Survey web site at: http://www.extension.iastate.edu/landvalue/. However, this method is rather imprecise, especially during periods of rapidly changing land values.
Crop Share Equivalent
Another way of calculating cash rental rates is to estimate the return that would be received by the landowner from a 50-50 crop-share lease. With a crop-share lease, the owner’s return is automatically adjusted by changes in yield, selling price, and input amounts and prices. However, to compute a cash rental rate using this method, estimates of yields, selling prices, and input costs must be made for the coming year, which is sometimes difficult to do.
An example using this method is presented in Table 2. Use five-year or ten-year average yields and current prices for harvest delivery. If prices are below the USDA county loan rate, use the loan rate instead, to reflect potential loan deficiency payments. Next, include the landowner’s half of the USDA direct payments for the coming year. You may want to refer to Information File Commodity Programs for Crops. Then subtract the landowner’s half of the seed, fertilizer, pesticides and other shared expenses. Property taxes are not subtracted because they would be paid under a cash rent lease as well.
In the example, the landowner will receive a rent of $164 and $154 from corn and soybeans respectively. With a corn/soybean rotation, the average return will be $159 (164 + 154) / 2 per acre.
To compute a rental rate for your situation, use the worksheet on the following page or enter your figures into the Decision Tool Cash Rental Rate Estimation.
Tenant’s Residual
Another approach is to calculate how much income the tenant has available for rent payments after subtracting all the tenant’s costs associated with producing the crop.
As in Table 2, you first need to estimate yields, selling prices, and government payments. Then subtract the operating expenses. Next, subtract the tenant’s cost of machinery and equipment ownership. This includes depreciation, a return on investment, insurance, and machinery housing. Some people contend that these costs (fixed costs) are incurred by the tenant whether the land is rented or not and need not be considered when determining a rental rate. But in the long run, these costs are incurred on all acres farmed and must be paid. Remember, no allowance has been made for risk due to variations in crop prices and yields. With a cash rent lease, the tenant assumes all of the risk. So the tenant should be compensated for assuming this risk. Do this by either using conservative price and yield estimates or adjusting the rental rate downward.
To estimate a rental rate for your own situation, use the worksheet on the following page or the Decision Tool Cash Rental Rate Estimation.
