Mike Preiner, a founder of Granular, proposes a different way to look at land rental rates.
- Don’t fall into the usual (rental) agreements out of convention or habit.
- Estimate yields for each field using its complete yield history.
- Compare your different rental agreements by grouping landowners and sorting fields using rent cost per bushel that field is expected to produce.
- Incorporate field-level input and labor costs to your field-level rents to understand how much room you have for negotiation
The low commodity price environment has spurred new thinking about land rent, often the most expensive item on the balance sheet.
Typically negotiated in dollars per acre, a farmer feels he has a good deal at $200 an acre. But flip that thinking on its head, analyzing the production on that land, and it reveals a rental cost north of $1.60 per bushel. Suddenly, this is not a good deal at all. You’d have to sell at $4 dollars, just to break even.
This is not just a scenario, but describes actual findings by the data science team at Granular, an up-and-coming player in the farm management software market. They dug into years of production history on forty-five farms to prove that low per-acre rental rates do not always spell a bargain.
Mike Preiner, founder of Granular and head of its data science team, believes rental price per bushel should be the decisive metric.
Calculate land cost per bushel
“In our comparison, $200 per acre looks like a great deal. It’s in your top 25 percent of landowners in terms of lowest rental rate, and so you might say, oh man, they are way below market, I’m getting a really good deal,” says Preiner. “But if you flip it around and say, what are my best landowners in terms of dollar rent per bushel? It turns out that, while they were only $200 an acre, they were also among the lower yielding fields. This is real data, from a real farm. All of a sudden, they are in your lowest 25 percent of landowners in terms of your costs per bushel. They’ve gone from being one of your really good deals, to one of your worst deals. If you are not looking at your rents this way, you can be negotiating with the wrong landowners.”
Granular’s research proved the disconnect between per acre rental rates and the actual productivity of fields. They found farmers in the same area paying $250 per acre rent for land averaging as low as 100 bushels average corn yield, and paying the same rate for other parcels that produced more than 200 bushels per acre. Likewise, comparing fields with a 180 bushels average yield, landowners were charging anywhere from $100 dollars to more than $350 dollars per acre. Even excluding sweetheart deals, the spread was remarkable.
Justin Durdan, who farms in Central Illinois, has become a user of both Granular and the precision agronomy service, Encirca. He farms with his parents Doug and Geri, and his wife Rachel, and they run about 10,000 acres, with around 90 percent of that land rented.
“We use Encirca to make agronomic decisions that put profit on the table for the farm, and then we use Granular to keep track of those records, to make sure that we are in fact making money on the farm.”
Even before signing up with Granular in February, Durdan used Excel formatted spreadsheets to track all the production costs.
Farm by cost per bushel
“We are actually converting everything into cost per bushel,” says Durdan. “We feel that is the fairest way to look at a field. If you look at gross, typically we try not to go over 30 percent of our gross revenue for our land rent. That’s not acre-by-acre, but that’s something we have watched for quite a few years.”
He is looking forward, with the new software, to being able to track how the return on investment differs across different parcels of land.
Finding ways to keep land rent costs down becomes even more important, Durdan feels, because cutting the cost of inputs at the expense of top-end yield is not sustainable. Tracking costs and rent on each acre can drive appropriate management decisions.
“You can manage lower quality ground,” says Durdan. “You look at a parcel and going by the indexes it’s got a B soil, and it may appear that you are overpaying, but in reality, technology allows you to make better decisions, and to move that B soil closer to an A. Variable rating seed, fertilizer. It might not be a bargain, but it’s a good business decision.”
Customize landowner relationships
Kyle Brase farms around 3,500 acres with a brother, a cousin and an uncle, 30 miles northeast of St. Louis. His primary tasks in the partnership are purchasing inputs and making agronomic decisions, negotiating rent contracts and calculating profits and losses. He believes in tracking the numbers closely to make sure the rental payments don’t stand in the way of sustainable returns. About half of the land in their operation is rented.
“You can’t overpay (for rent) just to maintain an acre base,” says Brase. “You have to make sure you are profitable in all those different segments, every crop, every acre, all of what we do.”
When it comes to landlords he tailors reports to their individual taste for information: some want a quick phone conversation, while others want to see yield maps and fertility replacement maps.
“I have an spreadsheet where I can plug in all of the operations that it takes to produce the crop, from tillage to combining. We try to look at everything. We look at our actual cost of fertilizer, chemicals and our seed, and put in real numbers,” says Brase. They also try to factor in equipment depreciation. The spreadsheet spits out a per-bushel price and gross per acre loss or gain. It might calculate the breakeven price to meet the cost of growing corn on a particular farm is $3.48. “We look at these numbers to determine what crops we can grow and be profitable. The land rent is part of that number.”
That information helps him establish with the landlord a price that’s fair to both parties.
Provide reasonable return
Most of our landlords, Brase says, are very cognizant of agriculture and the changing times. They ask us what we think. We discuss some long-term projects we have in mind for various fields. But we also learn what we can table to get us through this tough time. “We need to provide them with a reasonable return on their investment, because I know they could take their money and invest it somewhere else. We have to reward them as well,” says Brase. He knows there may be some farmers in the next two years who will say we are just going to back down and let this 100 acres go, or let this 1,000 acres go. But there will be plenty of producers waiting in the wings to pick those up.
Chad Davison uses his break-even spreadsheet to calculate a cost per bushel given changing rental rates – on both current and potential future ground. He and his father operate a 4,500-acre row-crop farm in the Red River Valley town of Tintah, Minnesota.
One land price challenge in Davison’s area, which isn’t too uncommon, is a few operators who set the market by aggressively acquiring rental ground at high prices. Landlords know that they can get a high price from them. So, despite the low price environment in the corn market, there’s less room to negotiate a rent reduction, Davison feels.
“Your biggest expense is your land rent and that separates the farmers who make money from the ones who don’t make money,” says Davison. “Anyone can spend money. These couple big farmers—they are spending big money. But are they making money? I don’t know.”
Know when to walk away
Davison heard a talk by David Kohl, retired Virginia Tech ag economist, who said that 20% of farmers made money last year, and the only difference between them and everyone else, is that they didn’t pay high cash rent. That’s it. The research compared what they marketed their crop at, their yields—everything else is very similar, except what they paid in land rent. “So to me, you just have to keep your ego in check. You might have to let some land go, or you might have to pass on some land and farm fewer acres. You have to swallow your pride and make the right business decision,” says Davison.
So that concept helped Davison walk away from an attractive parcel when he knew the possibility of making money at that rental rate was unlikely.
“Using my breakeven spreadsheet, I figured if I paid $250 cash rent, I would need almost 200 bu/acre corn plus a four dollar cash market, and I didn’t have it. That was just for a breakeven. It was not worth the risk for me,” says Davison.
Looking back, he says, I wound up being wrong about both the yield and price scenarios. But I still made the right decision because, what if I didn’t market all my corn when it hit four dollars, then I am losing money. The landlord is making money, but I’m not.”
Find alternatives that work
Though he hasn’t found room for negotiating lower rents, Davison’s analytical approach gave him information to help sway several landlords to accept alternative lease arrangements.
“Some landlords don’t want the risk of a share cropping arrangement). They have taxes every year too. But they will do some sort of flexible lease agreements,” he says.
“Say we average 160 bushels on this land and it does 200, we’ll give you a portion of it,” Davison describes the arrangement. “Or if the market price goes from three to five dollars, I’ll give you some portion of that. We do two flexible leases, one with a base price. If certain criteria are met, they get a bonus. Their base price is a little lower than the historical rental rate, but they have a lot of upside. If we have a great year, then they will get to participate in that.”