Regardless of the type of land lease you currently have (e.g., cash rent, crop share, flex rent) and regardless of the length of land lease terms (e.g., multiple-year, annual renewal), negotiating your leases with landowners can be a challenge. This can be especially true in times of volatile commodity prices, whether that volatility results in rising or falling prices. Being able to use your farm’s financials, either directly or indirectly, to assist with negotiating a land lease can help you create a win-win partnership between you and your landlord.
Understanding the True Cost of Production
Understanding how to utilize your farm’s financials to know the true cost of production for the various farm commodities your farming operation produces is essential to the continued success of your business. With this knowledge, you can properly select the most profitable commodities to produce. This knowledge is also important when determining how much your operation can afford to allocate in rent.
Your land lease expense is most likely the top expense (or at least one of the top five expenses) involved in your commodity production. Determining the true cost of production for any commodity involves more than simply understanding the operating profit (revenue less expense) generated from production; it must also take into consideration the capital requirements of various commodities. By implementing accurate managerial accounting, you can capture and report the direct expenses, indirect expenses, general and administrative (overhead) costs, and finance costs associated with each commodity at the farm level and/or field level relative to your individual land lease agreements.
How to Use Your Farm Financials in Lease Negotiations
The factors described above should be determined for each individual year’s production cycle. An analysis of the past 3–5 production cycles plus the next year’s production cycle budget relative to the land lease would be beneficial in lease negotiations. Perhaps your farm business management software provides you with the necessary tools to accurately report the true cost of production of each individual commodity and production cycle at a farm or field level, or as a (more time-consuming) alternative, you can develop spreadsheets or other solutions to provide you with this critical information. This could be described as indirectly using your farm’s financials to assist with negotiating land leases. If you use this information simply for yourself and do not, at least to some degree, communicate to your landlords your cost of production relative to the individual lease agreements, you may be missing an opportunity to ease the negotiation process.
Directly using your farm’s financials during land lease negotiations, if handled properly, creates transparency that can lead to increased trust and loyalty with the landowner. It is critical to include the following information when communicating with your landlords:
- Current market prices and relative future market prices
- Historical yields of the landlord’s farm
- Input prices
It also may be important to discuss specific land aspects such as soil types, APH, land improvements completed, and various “farmability” aspects of the landlord’s farm. Farmability aspects may include ease of access to the farm, the size and shape of various tracts (making them either easier or more difficult to farm), location and distance from terminals, and required maintenance.
To prepare for the negotiation, it is helpful to understand the landowner’s goals and present situation as much as possible. One common error involved in land lease rates is using the “going rate” in the area. This rate may not be fair for the landlord or for you as the tenant and may even be difficult to accurately ascertain. By understand and using detailed farm financials, the outcome of the land lease negotiation is more likely to lead to a continued positive long-term landlord-tenant relationship.
Transparency for Stronger Partnerships
While some farm operators may feel uncomfortable sharing financial information, it’s been our experience that the more information farms share with landowners, the more of a true partnership develops with both parties work toward common goals. Not that this sharing should not only take place during rent negotiations. Farms should strive to share market prices, input prices, etc. throughout the year to keep landowners better informed at all times; sharing this information only during rent negotiations makes it appear a little less genuine.
Where do you go from here? Do you have a proper understanding of your farm financials and true cost of production for each commodity, including both farm-level and field-level data? Do you need additional information about what factors to consider for a land lease negotiation? Seek out assistance that will provide you with the training and knowledge to be an effective business manager. If you believe your operation could benefit from AgriSolutions’ consulting services, click the image below or call (618) 372-3000.