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Know your cost of production before renting more land

Agrivision: You may want to consider a flexible-rent agreement.

July 16, 2020

7 Min Read
A sunset peeking through the clouds over a crop field
CONSIDER ALL ANGLES: It pays to evaluate if the time spent on extra rented land will take away from your present successful operation. Courtesy of University of Wisconsin-Madison CALS

Our neighbor is 74 and will retire this fall after he harvests his crops. He has 250 tillable acres. He asked me if I would like to rent his land for $175 an acre. That’s the average rental rate here, but I’m wondering if we should offer $150 an acre. Crop prices aren’t going up, and I’m not sure how profitable growing corn and soybeans will be next year. My son and I farm 360 acres and milk 100 cows. Our machinery can handle the extra acres. What are your thoughts?

Tom Kestell: I am pleased to see you are putting some serious thought into operating these additional acres. Many farmers think any crop ground close to them must be operated when available. This certainly is not true if you cannot show that you can make a clear profit by doing so.

Remember, your neighbor has a completely different cost structure for operating his own land. The land is probably debt-free, and he only has to pay the taxes and inputs on the crop land. So, if he shows a $100-per-acre profit, you will have a $70-per-acre loss if your production costs and yields are the same. It is often possible to operate more acres with your present machinery, but not without a cost of wear and tear, maintenance, and replacement for those extra acres.

In today’s world, many acres with tight margins are operated with a flexible-rent contract. This allows the landowner to share some of the risk but also capture some of the upside potential of a profitable crop year. Look into this type of contract. Not only does a flexible contract protect both the owner and renter, but the close attention to details also will give you a better handle on if the extra effort will be worth the investment in time and money. It would also pay to evaluate if the time spent on this extra land will take away from your present successful operation.

A comprehensive evaluation of your short- and long-term goals as a family needs to be part of the consideration too — meaning, how will this change of operation improve or, in some cases, deter from your present situation and where you want to be in the future?

Sam Miller: Negotiating land rent arrangements requires evaluating the benefits and drawbacks of the property and an assessment of fair value. Included in this analysis is the marginal rental rate for land.

Put together your thoughts regarding taking on these acres, such as proximity for feed, ability to spread nutrients from your dairy herd, spreading out the overhead costs of your equipment, etc. Also consider the added labor of operating more land. Additionally, what is the productivity and fertility of the property? Then consider the cost, and assign a value to begin negotiations with your neighbor.

You might want to offer a base rate with the ability to add an extra payment if yield, price or unexpected government payments are made. Your agronomist, farm technical college instructor or Extension ag agent may also be able to assist with your analysis and market prices.

Katie Wantoch: Many small businesses miss opportunities that come along. Even the best businesses may fail without dedication to their business plan and consistency. It sounds like you may have an opportunity to increase your cropping enterprise by renting the neighbor’s land. Do you and your son have a business plan or goals set for the short and long term? If you have identified that you would like to increase your crop acres, then this may be an opportunity worth pursuing.

Determine your crop cost of production and identify the breakeven rental rate you can offer and still make a profit based on the crops to be planted and local market prices. If you and your son do not have set and agreed-upon objectives for your farm, I would suggest that you detail what the future looks like. You may have the machinery needed for the additional acres, but have you recognized the extra risks that you’ll be taking on, such as additional labor hours, set marketing plan, etc.? Consider your options before talking again with your neighbor.

Selling heifers

We milk 160 Holstein cows and farm 225 acres in southwestern Wisconsin. Our herd average is 24,000 pounds of milk with a 3.7% fat test. We have 20 heifers due to calve in September. Originally, we were planning to expand our herd and milk those heifers, but we had to cut milk production 10% this spring. I’m thinking increasing cow numbers is probably not a good plan right now. What are springing heifers bringing? Is anyone buying them? Would fresh cows be worth more than springing heifers? Please advise.

Tom Kestell: You have several options on how to proceed. I will try to answer a few of your questions first. There is always a market for fresh heifers, but one of the problems is to sell them for more than the cost of raising them. I believe the demand for fresh heifers will be stronger than usual this fall for several reasons: One, many dairy producers sold cows to cut back on production due to COVID-19. They now want to increase production again to take advantage of higher milk prices. Two, many dairy farms have stopped raising all or a percentage of their replacements. So these farms must continue to buy to maintain herd size. Fresh heifers off to a great start will bring more money than springing heifers. Today’s buyers want to reduce their risks as much as possible, so they want them fresh.

However, I would look at this situation from a different angle. Look over your herd for the “weak link” cows, meaning those with poor reproduction, low milk production, high cell counts and mobility issues. In most cases, 1 out of 8 will fit these categories. I would keep your heifers, retire some problem cows and milk the trouble-free heifers, keeping the numbers the same and hopefully more profitable. Cull cows will probably be about 50% the value you can get from your fresh heifers, but the herd’s overall performance, workability and profitability should improve. Hopefully your heifers represent the best genetics and should easily return the investment in their future. Good Luck.

Sam Miller: The market changes brought on by the pandemic and shutdown followed by the slow reopening of the economy have sent signals to cut milk production and then to increase milk production. Who knows what those signals will look like later this year.

These mixed signals have flowed through to replacement cow prices, which have remained at the lower range of the past several years. A review of Wisconsin auction markets indicates a similar price for springing heifers and just-fresh cows. Begin discussions with cattle brokers and local auction markets. They are likely to have an opinion about the better value and timing of selling a few head. Good luck with your decision.

Katie Wantoch:

You may be correct in hesitating to expand your herd with the volatility in commodity prices and supply and demand levels. Research local market prices to determine if there is a difference between selling springing heifers and fresh cows.

You may need to consider what will be the risk versus the reward to holding on to your springing heifers. Risks: feeding springers reduces inventory, potential calving issues, lower milk production in first year. Rewards: retain or sell calf to be born, better genetics of fresh cow, increased longevity with herd.

You will be making an investment with the springers that will take longer to realize the return. You are already reaping the benefits from mature cows, but are they as efficient as you need right now? There are many decisions to consider, but taking into account your dairy operation’s bottom line will equate to improved profitability in the future.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension agricultural agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].

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