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Corn+Soybean Digest

Landlord Smorgasbord

Three-thousand acres and a seed business can create a mighty full plate for a farmer. Add to that 44 landlords and you've got yourself a regular buffet.

Andy Bensend, Dallas, WI, farms those 3,000 acres on 300 separate fields. Along with 40% corn and 40% beans on mostly rented land, alfalfa, wheat and canola are also in the diversified operation.

But Bensend seems as laid back as ever, even with the legion of landlords.

“Most of my landlords are retired farmers or folks who have moved to the country,” says Bensend, thankful that all rented fields are within 10 miles of his home base.

He steadily manages all the angles, both in his crop production and seed operation. Keeping the landlords happy without losing his ability to produce a crop efficiently requires a combination of sound business principles, being a good neighbor and good common sense.

“As a farmer and a seed sales rep, I'm in the people business,” says Bensend. “I learned a long time ago that you have to listen to what their needs and wants are. That's probably the main thing to remember when dealing with so many different landlords.”

Second is to “never be late with a rent payment,” stresses Bensend, “or, at the least, communicate with the landlord why a payment will be late and when you can get caught up.”

Another key component is knowing that a handshake, although still a common understanding to many, isn't enough in a lease agreement. “You need to trust your neighbor, but build good fences,” says Bensend. “You need to have good contracts in place. You must have documents - especially when you're dealing with 44 different people.”

He also learned years ago to treat family member landlords just like any other. “I rent some land from my dad, an uncle and a brother,” he says. “I pay the same to them as I do others for the same type of land.”

Having a solid written contract is even more important in today's era of high crop prices and the high cost of growing them. Landowners see the tickers for $7 corn and $15 beans and want their share of the bounty.

“The bulk of my contracts are for about 15% of the gross market value of the crop,” says Bensend, pointing out that “there's no such thing as a typical cash rent anymore.”

Phil Harris, University of Wisconsin-Madison agricultural economist, is also an attorney and authority on lease arrangements and other aspects of farm management. He says growers and landowners alike are as interested in knowing which type of cash rent to consider as they are in estate planning.

“One problem with a landlord lease is knowing when it ends,” says Harris. “Some landowners also feel they should receive a portion of farm program payments. All of these questions and others should be specified in a contract.”

FOR DECADES, two common rent contracts have involved either cash rent or share rent agreements.

An alternate system involves a variable cash rent lease. In this program, reviewed recently by the University of Illinois farmdoc program, the farmland owner and operator negotiate a base cash rent derived from expected soybean or corn yields and the current price for new-crop futures contracts.

In a sample agreement, actual cash rent will be the base cash rent adjusted for changes in corn futures prices between the time the lease is negotiated and about March 1.

In a farmdoc example ( where cash rent adjusts with futures market changes, a grower and landlord negotiate a lease on Oct. 1, 2008, for a 100-acre farm for the 2009 crop year.

They agree to a base cash rent of $20,000, or $200/acre based on their expectations of yields and prices for the new crop, and other factors such as the productivity of the farm, its proximity to cash markets, anticipated input costs and the local rental market for farmland.

In the agreement, actual cash rent paid by the operator will be the base cash rent adjusted for any change, up or down, in the price of the December 2009 corn futures contract on the Chicago Board of Trade.

The change in price will be the difference between the futures contract price on the day nearest the date of lease signing and the average trading price of the same futures contract during February.

Using this program, if the agreement is based on a $6.50/bu. futures price on Oct. 1 and the futures market increases by 10% to $7.15 by next February, then the actual cash rent will be approximately $220 or 10% higher than the base cash rent.

The advantage of the farmdoc variable cash lease example is that it allows a grower and landowner to negotiate a fair lease much earlier in the fall preceding the crop year because the rent automatically adjusts for changes in futures prices occurring after the lease is negotiated, but before spring planting.

HARRIS SAYS LANDLORDS and growers alike should look at the tax implications of a lease arrangement. “If a landlord puts in new tile lines, fences or makes other improvements to land, there can be a question as to whether he or she receives tax deductions such as the I.R.C. § 179 deduction,” he says.

Bensend says another consideration by the grower lessee is whether he can guarantee that the land will continue to be available for several years, especially if the grower uses a no-till-type program. A significant investment is often made in GPS and integrated records of yields and soil fertility.

“With high N costs and a strong conservation ethic, I plan for my no-till crops and strip-till corn to capture credits from prior-year legumes,” he says. “I need to know a field is available to match my production practices.”

Marketing is also vital to him. And he regularly uses futures and options to manage his price risk. “I like to forward sell on the cash market, but will also use futures and out-of-the-money options,” says Bensend, who is an active player and on the leaderboard in the MarketMaxx grain marketing contest from Corn & Soybean Digest.

“I try not to hit a home run. I go for a number of smaller trades to get the same results in the long run,” he says.

Working with a number of positions, whether it be in marketing, production or with a landlord, involves his knack for people skills as much as anything.

“Whether it's seed customers or landlords, you treat them like you want to be treated,” he says.

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