|Communication is Key in Land Rental Arrangements|
What’s the best kind of arrangement when it comes to renting land for crop production?
The answer depends on a host of issues, not the least of which is whether you are a landowner or a producer. But one expert on the subject said there’s one ingredient that needs to be more prominent in cash rental agreements: communication between the parties involved.
Kevin Dhuyvetter, an economist in the department of agricultural economics at Kansas State University, keeps a close eye on land rental and leasing arrangement practices. He believes the trend is toward more cash rental, although not all cash rentals are structured the same way.
"Is the landowner’s cash rental rate fair and equitable?" he asked.
Answering his own question at a recent seminar on land costs at the University of Missouri, Dhuyvetter said, "Both the owner and the tenant are responsible for making sure it is."
Reasons for the cash rental trend are numerous and varied, the economist asserted. Landowners increasingly are most distant from the farm, both physically and generationally, and don’t understand production agriculture as well. In that scenario, cash rent is simpler and there’s more security for a predictable income.
Other reasons for the cash rental trend include:
· The volatility of input prices can make landowners uncomfortable when agreements call for sharing the cost of those items.
· The complexity of farm programs and crop insurance.
· Tenants generally are dealing with more and more landowners, making simple cash rent agreements easier from a management perspective.
· Handling aspects of technology adoption is easier. For example, if fertilizer and/or herbicide costs are shared and the tenant invests in GPS and precision farming technology, the landowner benefits from the lower input costs, but the tenant has all the investment leading to the reduction.
While producers tend to lease land from the same landowner for a relatively long time, Dhuyvetter has found cash rent agreements tend to be for shorter periods.
"The obvious thing most everybody will point to is that cash rent is more transparent and thus it’s much easier for somebody to come in and bid the land away," he explained.
However, another less obvious reason is the landowner and tenant communicates much less with cash rent than with various types of crop share arrangements.
"With crop share, a tenant has to tell the landowner how things are going with the crop, what bills may be coming up, what the yields are, where the crop is stored and what the crop insurance options are," Dhuyvetter said.
"With cash rent, you simply need to put a check in the annual Christmas letter," he noted. "Okay, that’s a bit of an oversimplification, but I think you get the point. Bottom line, tenants who move to cash rents need to make a point of communicating much more."
Dhuyvetter believes a lack of communication makes it easier for a landowner to accept a higher bid if and when one comes along, and also may be a factor in the small, but growing, number of cash rent auctions.
There’s little doubt most land tenants don’t like such auctions. In general, producers said the method ends up in a numbers game, taking away any personal relationship between the two parties. The results also let all landlords in the area know what cash rents are, enabling them to determine how their leases compare.
Those views are all the more reason why tenants should be pro-active in sharing information with their landlords, Dhuyvetter said.