Opinion: Honest numbers key to cash rent negotiations
KNOXVILLE, Tenn. -- With the setting of land rent becoming critical to maintaining profitability in the current price environment, it is important to understand the shape of farmland ownership and tenure.
KNOXVILLE, Tenn. - With the setting of land rent becoming critical to maintaining profitability in the current price environment, it is important to understand the shape of farmland ownership and tenure.
The U.S. Department of Agriculture recently released a document, “Farmland Ownership and Tenure: Results from the 2014 Tenure Ownership and Transition of Agricultural Land Survey.”
Drawing on the data in the 2012 Census of Agriculture, the document tells us 38.8 percent of agricultural land is “rented or leased from someone else,” though there is wide variation at the county level. In the grain belt, more than 60 percent of the land in most counties is rented.
With land the largest cost in the production of crops, renters do not have the luxury of those who farm their own land to ignor the cost of land when prices are below the full cost of production like they are today. While we don’t have a magic wand to offer renters more manageable prices, it can’t hurt to understand more about the landlords.
Of the more than 2 million landowners who rent out their land, “87 percent …do not operate a farm (nonoperator landlords).” Looking at the acres rented, “20 percent were rented out by operator landlords, and 80 percent by nonoperator landlords.” Three-quarters of the landlords are “principal landlords … either individual owners or the principal in a partnership arrangement.”
In 2014, principal landlords (average age of 66.5) were older than principal farm operators (average age 58.3). Those “65 years or older in 2014 … account for 67 percent of the rent received.” Most of the principal landlords are college educated.
“Fifty-four percent of principal landlords are not currently in the paid workforce,” a fact one would expect, given their average age. Just under half (45 percent) of all principal landlords have never farmed.
Operator landlords received $6.9 billion in rental income, spent $1.9 billion in expenses and carried $7.9 billion in debt on land and buildings worth $200 billion on acres rented out. Nonoperator landlords received $24.3 billion in rent with $7.4 billion in expenses on land and buildings worth $931.9 billion. They carried a debt load of $24.8 billion on the acres they rented out. Some of the listed expenses are for land that is share rented.
Fifty-four percent of the land rented by nonoperator landlords was acquired through inheritance or gift, while 31
percent was purchased from a nonrelative, and 11 percent of their land was purchased from a relative. Among operator landlords, 41 percent of the land they rented out was purchased from nonrelatives, 37 percent was acquired as a gift, and 17 percent was purchased from a relative. “Eighty-nine percent of the acres rented out by operator landlords, and 94 percent of acres rented out by nonoperator landlords, were fully paid for.”
Since landlords, as a group, have relatively little debt on their land, that would suggest they have negotiating room with land rents. On the other hand, because most landlords are in or are near retirement, they might have become accustomed to the increase in rents of the past few years and they might not want to jeopardize their lifestyle for other considerations.
The renter should prepare per-acre revenue against expected per acre nonland costs using the high prices of the past and the low prices expected next year. Farmers know their landlords well, but if many of them have no farming experience, they might not keep up with changes agriculture faces, and might live far from the land they own, so time spent talking to them about farming and the challenges agriculture faces could be a wise investment.
From the renters’ perspective, hard facts are probably going to be the best way to find a number that is acceptable to the landlord. Consider adding a term in the agreement that would allow the level of rent to increase if prices increase.
Editor’s note: Schaffer is a research assistant professor in the Agricultural Policy Analysis Center at the University of Tennessee. Ray is the former director of APAC.