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Finance first: Can costly cash rent acres be replaced?

If you get rid of that farm the remaining acres must care more fixed cost burden.

What are your thoughts on the cash-rent ground I have where the rent is way too high for its productivity? — T.C., Indiana

Cash rent is always a hot topic, and rightfully so. Generally, many farmers feel their cash rent is too high, but that frustration can be at its greatest when you have a piece of land that isn’t very productive. You feel like you’re paying too much for it, but you’re not sure what to do.

On the surface, it can be tempting to want to just let land go because you feel the rent is too high. But in doing your calculations, think about this: How readily can I replace those acres with lower-cost or more productive acres?

If you get rid of that land, the challenge becomes spreading the farm’s fixed costs over fewer acres. The result is that the remaining acres have to carry more of the cost burden.

As you wrote in your question, the price for the productivity is just too high. But it’s also possible that if you give up the land and can’t replace it, the farm actually ends up worse off overall.

In making land decisions, consider not only the particular piece of ground in question and its individual profitability, but also the impact of that land on the entire operation. You also need to know your chances of replacing those acres with different ground, whether at a lower cost or more productive at the same cost.

Get a financial analysis of both the individual piece of ground that you’re thinking about letting go, as well as an analysis of how keeping or letting it go will impact your operation’s numbers. Take a close look at all the numbers before making decisions about land.

Frye is president and CEO of Water Street Solutions. waterstreet@waterstreetconsulting.com

TAGS: Management
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