Whole Farm > Leasing > Cash Leases

Creating a Flexible Swine Building Rental Agreement

File C2-27
Updated July, 2009

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With volatile hog prices and the growing turnover of producers, there is renewed interest in leasing swine production facilities. One method of renting swine facilities is to develop a flexible rent schedule. The advantage of this innovative rental arrangement is that the rental fee rises and falls with changes in the local monthly hog price. Allowing building rents to fluctuate with the price of hogs reduces risks for producers who need to keep their production costs low to remain competitive. Also, the flexible rent schedule provides an income for former swine producers who still have value left in their facilities.

Developing an Agreement

Base rental rate
A base rent for the swine facilities can be established by using one of the methods outlined in Information File Computing a Livestock Building Cash Rental Rate. As a general rule, the facilities cost is in the range of 10 to 12 percent of the cost of production.

Rent adjustment factor
To compute a rent adjustment factor, establish a base market hog price. This can be a typical or long-term average hog price. You can use Information File Historic Hog Prices as a reference.

Next, estimate the actual market hog price for the lease period. You can use the quoted cash price from a local hog buying station at the middle and end of each month, or monthly market prices collected by the National Ag Statistics Service at: www.nass.usda.gov (go to Quick Stats). An alternative is to use the USDA Marketing Service cash index price, which is reported daily at www.ams.usda.gov/lsmnpubs/.

At the end of the lease period, compute the rental adjustment factor by dividing the actual market price by the base market price. The rental payment is then adjusted higher or lower, depending on the rent adjustment factor. For example, if the base market price is $55.00 per cwt. and the actual live market average price is $49.50, the rental adjustment factor is .90 ($44.50 / $55.00). If the base rent established above is $30,000, the actual rental rate is $27,000 ($30,000 x .90).

A portion of the rent (e.g. one-half) may be paid at the beginning of the rental period with the remainder due at the end of the rental period.

Rental window
In order to reduce extreme changes in rent due to large fluctuations in hog prices, a minimum and a maximum rental rate (rental window) may be used. For example, a rental window may allow the rental rate to be no more than 25 percent above or below the base rent. With a base rent of $30,000, the rental rate could be no less than $22,500 and no more than $37,500.

Executing the Agreement

A legal written lease agreement needs to be formalized between the owner and renter. The base rent, the base market price, the lease period, the rental payment provisions, and the rental window need to be agreed upon by both parties. The agreement can provide an extended lease period with a yearly review of the lease. The lease should be very explicit about how the average payment period price will be determined and who will collect and establish the price.

Example
1. The lease period is from January 1 to December 31.
2. The base annual rental is $30,000,
3. One-half of the base rental payment ($15,000) is due on January 1 and the remainder on Dec. 31.
4. The base market price is $55 per cwt. (live.).
5. The cash live market at a local buying station on the 15th and 30th of each month is used to derive the monthly market prices.

Assume the average market price during the year is $58.67 per cwt. (live).

  • The first rent payment is $15,000 ($30,000 / 2 = $15,000)
  • The rent adjustment factor is 1.067 ($58.67 / $55 = 1.067)
  • Total rent is $32,010 ($30,000 x 1.067 = $32,010).
  • The ending rent payment is $17,040 ($32,010 - $15,000 = $17,010)
  • The pigs marketed per year is 3,018 (2.8 turns x 1,100 head x .98 (2% death loss) = 3,018)
  • The rent per pig marketed is $10.61 ($32,010 rent / 3,018 head = $10.61)

Assume the actual average market price is $45.60 per cwt.

  • The first rent payment is $15,000 ($30,000 / 2 = $15,000
  • The rent adjustment factor is .829 ($45.60 / $55 = .829)
  • Total rent is $24,870 ($30,000 x .829 = $24,870)
  • The ending rent payment is $9,870 ($24,870 - $15,000 = $9,870)
  • The pigs marketed per year is 3,018  (2.8 turns x 1,100 head x .98 (2% death loss) = 3,018)
  • The rent per pig marketed is $824 ($24,870 rent / 3,018 head = $8.24)

Summary

This method of renting swine facilities requires great attention to market prices as well as coordination and communication between the rental parties. But it offers a fair and equitable arrangement to both parties in times of highly volatile market hog prices.

 

Don Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu
William Edwards, retired economist. Questions?