Predictions For 2014

Cropland Predictions For 2014

What does the next year hold for the cropland business?  I expect demand to remain strong.  At some point in the next handful of years I expect a cropland gold rush.  A lot of aging farmers who own land are hanging on and waiting to see if they can't sell at the top.  Usually these farmers would've sold by now but they are patiently waiting to see where the prices will hit there peak.  When we start getting close to that expect the market to flood with cropland.

Rents will be tied to crop prices.  Whether they go up or down that's what you should expect cash rent to follow suit.  This isn't any amazing revelation I know but it's something to not forget while going forward.

Acreage will be based on crop insurance.  We are seeing crop insurance more and more affecting the cropland market.  That mostly comes from the drought we had a few years ago.  I don't see this changing anytime soon.

Volatility will continue.  This is where you will decide what kind of operation you are going to run.  All depends on your personality.  Are you a risk taker or not.  It all depends on your comfort level how you want to run your operation.  Remember, it's your farm.  Run it how you want to.

Have a Happy New Years and let's look forward to 2014!

Crop Inputs

Changes For 2013

There were some changes to the amount farmers and farm owners had to put into their farms.  Crop production was up 1 to 4%.  Seeds were up 5 to 10%.  Machinery went up 1 to 6%.  Fertilizer, interest and fuel all remained the same.

These are trends to keep an eye on as we move into 2014.  It can help you make an informed decision on what kind of farm operation you want to run.

Have a Merry Christmas folks!

Analyzing Operating Alternatives

With all the information I've given you on the different ways to run your farm, the next question you should be asking yourself is what's the best way for me?  How should I run my farm operation?  You should use the market indicators to help you make an informed decision.

Actual Negotiated Cash Rent

You need to find out what land is going for in your farms area for cash rent.  If it's high maybe that's the way you want to go.  If it's low you may take an alternative such as share crop or custom farming.  You have to know what you're comfort level is.  That's the best way to get started.

Actual Production History

This is a valuable tool. This will tell you what the land has produced in the last handful of years.  You will know if it's good producing land or bad producing land.  This is an excellent tool when deciding what farmland to buy.  I highly suggest getting this before making a purchase or decision on how to run your land.  I would also suggest having a farm manager look over this for you.  Sometimes it's like reading a different language.

Guaranteed Revenue Protection

What kind of crop insurance do you have?  What's the protection you have against a bad crop year?  This will help you know if you can take a bigger risk in doing custom farming or if you need to play it safer and do cash rent.

Projections of Future Pricing

For this I would hire a farm manager or consult with a farm management company for.  They have employees that all they do is look at farm futures.  They are a good tool and can help you make better decisions on how you want to handle your farm going forward.

Trends in Leasing

Over the last handful of years cash rent has been on the rise in popularity when it comes to cropland leasing.  This is due to many inexperienced buyers coming into the market.  There is a new idea creeping up into the cropland leasing world.  It's called cash rent plus leasing.

Cash Rent Plus

Cash rent plus is a new trend in cropland leasing.  How it works is very simple.  Take the base rent regardless of price or production and add it to additional rent if prices rise or production is above average. 

For example.  Let's say the base rent is $300 per acre.  Remember, this is regardless of yield or price.  You would add that to additional rent based on 33% of actual yield.  You would then multiply that by the average of spring and fall crop insurance price.  Then take out the base rent and you would have your plus rent.

Let me show you the numbers in another example in case that didn't make sense.  

200 bushel corn yield X $6.50/bu.= $1,300

$1,300 X 33% = $429/acre

$429.00 total rent - $300 base rent = $129/acre extra rent

Risk vs. Reward

Most farms in most communities have several operating alternatives.  The fall along the line of the old risk vs. rewards slide.  You have cash rent, bushel leases, net share leases, crop share, blended custom, custom farming and direct operations.

Cash Rent

There is typically no risk in production or price when it comes to cash rent.  There is usually an agreed on fixed amount based on a few things.  Your farm production potential, the price outlook for commodities, government payments, competition for land in your area and any improvements needed.  An example of improvements would be houses, buildings, grain storage, irrigation equipment or tiling.  Some people do half payment at the beginning of the year and then the rest at the end of the harvest.  I highly suggest you receive payments in advance for the full amount.

Bushel Leases

In this case you would share the risk and reward of the price.  It would entail a fixed number of bushels of a crop delivered to a specified location by a certain date.  This kind of deal is gaining popularity due to higher commodity prices.  It's very attractive to some large operators.

Net Share Leases

Here you would share partial risk and reward of production and price.  This is very popular with large farm operators.  The reason is that there is no inputs to keep track of and divide.  Many landowners like this as well.  They have no inputs to pay at all.

Crop Share

In this you would share both the risk and reward of production and price.  There are some common modifications to this.  It can reduce input expenses of the landowner.  Inputs would be seed, chemicals, harvest and trucking and irrigation and fuel.  You can adjust percent of crop to the owner.  For example, you can change a 1/3 share to a 2/5 share or a 2/5 share to a 1/2 share.  You could also add supplemental cash rent which would often be due in the fall.

Blended Custom

This is an enhanced sharing of production and price risk.  Landowner pays all crop input costs and receives 80% to 90% of the crop.  Operator provides the labor, machinery and fuel.  The operator receives 10% to 20% of crop and government payments.  The operator is motivated to produce well.  Owner is rewarded for additional investment in crop inputs.

Custom Farming

Here the owner would assume all risk of both production and price.  Landowner pays all input costs.  Landowner hires all operations completed.  Landowner receives all crop revenue and government payments.

Direct Operations

In this one owner assumes all risk of both production and prices.  The owner would pay all input costs, employs labor and owns equipment and may own livestock.  The owner would receive all crop and livestock revenue and government payments.  The owner may also do recreational leasing.  Remember, profits would vary by operation.

Your Personal Goals

How to operate and own a farm may not be the same from one owner to the next.  You may have different ideas of what you want you farm to look like, produce or you may have long term goals.  Here are some of the different ways a farm can be operated and managed.

Generate Income

There are many different ways to do this.  You could farm it yourself.  Under this you would be the operator, assume all the risks but reap all the rewards.  You could custom farm it.  Here you pay someone a fee to farm it but you take in all the rewards but assume all the risk.  You could share crop it.  Usually this is a 1/3 to 2/3 split.  Meaning you would put in 1/3 of the cost of fertilizer and other cost and you would reap 1/3 of the profits.  The farmer would get the rest.  Finally you could cash rent it.  This the safest way to do it.  You rent the land out to a farmer who pays you an agreed upon amount.  He then takes all the risks and rewards.

Maintain Family Legacy

Perhaps you're thinking the long game here.  Maybe you want something to pass down to your children or grandchildren to help secure their financial future.  There are ways to do this.  Often times it's done through a will.  I will go into this in much more detail in later posts.  But this is something many people do and are interested in.

Make Improvements

Are you willing to put in the money to make your farm more profitable?  What are the improvements I'm talking about?  Things like terracing, removing timber, shrubs or leaves and adding irrigation are just some ideas.  This would be something you should consult with your farmer on.  He'll know whether or not it's worth doing or not.

Manage Income

How hands on do you want to be?  Some people are just fine with handle all the farm finances.  Others just want to get there check and call it good.  Folks who like to do that should consider hiring a farm manager.  They'll keep an eye on your farm and your income.  This way you don't have to worry whether or not your being cheated.

Maximize Income

If you're an astute farmland owner you probably already have a grasp on this.  Two things can really help you maximize your farm.  First, and most importantly, find a trust worthy farmer.  This is so important.  If you have a farmer that's treating you fair and has a good track record of such, take care of him.  Your farmer is your gateway to success.  Another idea is to hire a farm manager.  They make sure the farmer is putting in fertilizer when needed, planting when needed, harvesting when needed and many other things.  If you are uncomfortable with your situation, this is the best way to ease your mind.

How Do I Feel About Risk?

Some people love to gamble.  Others like to play it close to the vest.  Run your farm how you feel comfortable.  Remember, it's your farm.  So run it how you see fit.  If you like the idea of the gamble and putting some skin in the game, go ahead and custom farm it.  If you like getting a check on the first of the year and being done with it, then cash rent it.  Let the farm match your personality and you'll be a whole lot happier with it.

Do I Want To Add To My Farm?

This is where you decide if you want to just own one farm or do you want to expand your business.  Here you're doing good.  You understand the industry and you feel comfortable with your farmer.  Why not expand your farming business.  You could just buy more land out right.  Or you could flip the land you currently have to buy a much larger tract.  There's no reason you should stop at one farm once you are comfortable financially and personally with the farming business.

Other Considerations

More Things To Consider

This is an addition to my previous post about things you need to consider when buying and operation farmland.  First thing is improvements.

Improvements

Sometimes a farm just needs some work to make it better.  You may need to remove some trees or water ways.  You may need to add some phosphate to it.  Or, like these pictures indicate, you may add some irrigation system or need to have it terraced.  Now I wouldn't think you would have to go to this extreme as shown but I wanted you to see what I meant when I said terraced.  Why would you have to terrace?  It keeps water from flowing too freely on your land and washing away the soil.  It also allows to the land to soak up more water.  Also, it's one of the main reasons we should never see a dust bowl incident like in the 1930's

Operators in the Area

 As with everything we do here this is the most important step.  Finding a local farmer in the area.  You need to find a farmer you trust.  And that is the key.  That is what we at Rural KC will do for you.  We have a network of farmers in and around the Kansas City area that we have developed a working relationship with and trust.  What these farmers do for us is identify good ground.  Either ground we've brought to them or ground they've found.  Then they will give us what they believe a good bid will be.  We only work with farmers that keep the investor in mind.  They understand you need to make your money too.  So when they bring a bid to us they are trying to make it work for everyone.

Remember...

It's your farm.  It's your business.  Treat it like one.  Treat your farmer and your farm manager, if you choose to use one, fairly.  If you do those things then you'll be successful in the farming business.

Fitting The Pieces Together For Your Farm

Considerations

When looking for a farm to buy you need to consider a couple things.  First thing is to remember it's YOUR farm.  Not the farmer's or the farm manager's it's YOUR farm.  You'll want a farm that fits your personality.  And no I'm not talking about whether or not you have sense of humor.  I'm talking about it needs to match your current situation and your goals.  Other things to consider as follows.

Location

Do you want to be able to drive to your farm easily?  To some this may matter.  They may want to have the ability to keep their eye on what's going on with their investment.  Or you may want to be close to town with the idea of selling it for development ground.  Others may not care about the location at all.

Soils

This may be an obvious thing but I figured I would hit it anyways.  For a farm to be a good farm it needs to have good deep soils.  We at Rural KC will help you identify what's good soils and not.  We will look at the depth and soil type and that helps us define what is good and what isn't.  But most importantly, we lean on the opinion of a local farmer over this.  A local farmer knows which farms are good and which aren't.  While these soil maps are great.  Nothing beats local knowledge.

Farmability

This is something the local farmer should be the go to guy.  However, by looking at an aerial you usually can get a good idea if it's farmable or not.  First you would look at the soils and make sure they are deep.  Next you need to ask yourself a few questions.  Is it hilly?  Is it rocky?  Is there too much timber?  Is it in pasture or already broken up?  If it's in pasture is there farmland around it?  These are good starting points but once again, the local farmer would be the best one to answer this question.

What Can a Farm Manager Do For You?

Landowners have benefited greatly from using farm management company.  Farm management companies can take away most of the stress and hassle involved in owning a farm.  What they do great is management of the farm and consultation with the land owner.

Farm Manager Can Help You Manage Your Lease Risk

Right now demand for land to rent is at a fever pitch in many areas.  Your farm manager can make sure you are getting what you should be getting in return.  He will make sure you are working with a farmer that respects you and your land.  Because, without that respect you could be taken advantage of and left with land that'll need to work to produce crops.  The farm manager will know the good and bad points about your farm.  He will help you negotiate from a position of strength.  Your farm manager will take care of everything for you so you can enjoy your farm asset as this is truly the golden age for agriculture.

Peace of Mind

Like most people, you are thinking about investing in farmland not only for your self but for your children or future children.  A farm manager can help you with that as well.  He make sure it's his fiduciary care for future generations.  He will make it a blessing and not a burden.

What's the Rent?

Cash Rent Ranges

It's a common question I get often.  And I get it often from people emailing me from this blog.  It's not an easy question to answer.  Each farm is different.  Each region is different.  Each state is different.  And each farmers and owners goal is different.  So what I'm going to give you is a wide range of possibilities for the states of Kansas and Missouri.  Since those are the states I'm most familiar with.

Kansas

Dry land in Kansas tends to run from $40 to $200 per acre.  Irrigated ground where the owner owns all the equipment is usually $250 to $300 per acre.  Irrigated ground where the owner owns only the well tends to run $200 to $250 per acre.  Land that is gravity irrigated is around $150 to $200 per acre.  And pasture ground ranges from $4 to $26 per acre.

Missouri

Dry land in western Missouri is usually $75 to $200 per acre.  Irrigated ground where the owner owns all the equipment usually is between $150 to $300 per acre.  Irrigated ground where the owner owns the well only runs from $100 to $200 per acre.  Gravity irrigated land runs $100 to $200 per acre.  Pasture ground runs from $10 to $50 per acre.  While I'm not so confident in eastern Missouri I'll give a vague estimate.  Land usually runs around $150 to $275 per acre.

Need To Be Aware Of...

Start Simple

What is it you need to be aware of when thinking about your farm management plan?  While the first aspect is simple it's something some people make way more complected than it needs to be.  You need to think about the lands profit potential.  Basically, think of the income and expenses that go into the land.  You will also have to keep in mind your relationship with the farmer.  This will impact managing the farm as a valuable asset in one way or the other.  You don't want to hover over him constantly yet you can't be an absentee owner.  Absentee owners often get taken advantage of.  I heard a saying once from a farm manger that I love.  "What makes the crops grow the best?  My shadow."

Negotiation Skills

What are your negotiation skills?  Do you enjoy this part of the process?  Do you expect fair market value for your assets?  If you answered yes to this then you should consider custom farming.  I would highly suggest looking into hiring a farm manager to handle this.  They will get you the best deal you can for a small portion of the profits.

Written Lease

How would the farm manger work up a written lease?  I'll go over a quick standard way it's done.  While each deal is different this is the basic way it's written up.  First off he would negotiate a new lease every year.  This would insure that you get most out of the land year to year.  He would secure the cash rental payments or collect up front.  He would form a lease that would protect you and the farmer.  He would guard against any subleasing.  The lease would make sure you know your farm's production capability.  And they would use studies from local universities on cash rent.  However, take them with a grain of salt.  These studies tend to be out of date by the time they become public.

Cost of Management

This is simple much like the first step but often people don't think about it.  Basically this is the difference between what the owner/farm operator thinks might be fair vs analysis of value the land brings to farming operation.  Simply put, think of it like any other business.  Most first time investors forget that it's a business and treat it differently.

Farm Management. Is It Right For You?

What are some possible expenses to think about when coming up with a management plan?  Think about the size of the field.  The reason is obvious once you give it a second.  The larger the field the larger the equipment would have to be and may be used by more than one operator at a time.  Also, think about what you want your return on investment to be.  To possibly boost that up a bit you have to think about putting back into the land as much as you take out.  If you continue to work your farm to death eventually you'll kill the soils and you won't be able to produce on it anymore.  A good farmer or a good farm management company can do that for you.

A Cash Rent Lease is Not a Management Plan!

A cash rent is simple.  Farmer farms and you get your check.  That's it.  But how do you know you're getting the most out of your farm?  What if you want to custom farm or do a share crop?  This is what a farm management company can do for you.  It can require routine soil tests and review them.  Require actual yield results each year.  They can do this through a insurance yield approach.  They will meet the operators yearly.  During those meetings the farmer and manager can create a plan for the farm including a fertilizer and herbicide plan.  The management company can stipulate who maintains improvements on the farm.  The best thing a farm management company can do for you is keep regular communication and general farm appearances.  This is very important.

Solving The Leasing Puzzle

Leasing Formula

How do you go about putting a farm lease together?  Start with these four questions.  What are the commodity prices?  Will improvements need to be made?  How productive is the land?  Is there a demand for you land?

Other Factors

You need to get an idea of what the USDA net farm income would be.  That would give you a jump start on where to begin negotiating.  And lately they've been great.  In 2011 we had the second best year for record income.  And 2012 was the third best year in record income.  Farmers generally have cash on hand which is one of the reasons most deals are cash deals and not debt driven.  You no longer have to worry about a bubble for the cropland market.  Debt to asset ratio is 10.3%.

Weather Patterns

You know that old saying in housing and commercial real estate.  What's the three most important things?  Location, location, location.  Farmland falls right into that as well.  Depending on where you were located, yields from the drought were reduced from 0% to 80%.  So if you live in an area with warm days, cool nights and steady rainfall patterns, you're looking good.  Ever wonder why Iowa is the hot bed for cropland?  It's in the sweet spot of climate and rain fall.  No other state has what Iowa has.  However, this is also the reason Iowa land is by far the most expensive in the United States.

Crop Insurance

The prices in the fall of 2012 will dictate what the prices of 2013 would be should a farmer have to use insurance.  For example, in 2012 corn was $7.50, soybeans were $15.39 and wheat was $8.78.  2013 farm finances are looking strong.  Crop Revenue Protection for 2013 is at profitable levels again.

What's Changed?

Late summer 2013 prices came in looking good.  Cash corn was $6.70 and new crop corn was $4.50.  Cash soybeans $13.30 and new crop soybeans was $11.60.  Cash wheat was $7.00.  This shows despite the rough last couple years farming is still very profitable.  Insurance prices as of July 24th of this year ar $4.80 and $12.55.  Farmland values are very strong and continue to rise as well as the return of investment.  Farmer's are sitting in a great strong cash position.  

A Farm Gold Rush Is Coming!

Farmers Are Getting Older

Are farmers getting older?  Yes they are.  Why is that?  It's not what you think.  Farmers are getting older but it's not because they have to keep working.  They are sitting on a gold mine and they know it.  Farmers are getting older because they see the prices skyrocketing.  Analysis predict at some point prices will drop back to normal rates.  Instead of raising 20% each year, in the next couple of years we should see prices raise around 5% each year.

So, what does this have to do with farmers getting older?  They see the same thing we do.  Many farmers are waiting to see where this ends.  They want to cash out at the highest possible rate they can get.  And that is coming soon.  A farm gold rush may be upon us in the next few years.  

What will that do to the market?  It should become highly competitive.  Which could spell good news for buyers.  When there is a lot of inventory in the market, sellers will compete for buyers.  That day may be coming soon.

Sounds Like a Bubble

Now I understand that this sounds familiar to some of you.  The idea of more inventory than buyers sounds a lot like the housing market bubble burst.  However, remember most farmland is being bought cash.  For a bubble like the housing market to exist you need it to be driven by debt.  And for the farmland market to crash we would have to have a global event take place like the embargo against Russia in the early 80's.

So a farmland gold rush is coming!  This I have no doubt.  Be prepared.  Be informed.  We can help you with that.  Call us at 913-837-4665 or email us at info@ruralkc.com.  Talk with one of us and get on our email alerts to stay up to date.  Don't be left behind.  Because the farmland gold rush is coming.

How To Stay Informed

How We Keep You Informed

What can Rural KC really do for you?  We can keep you informed on what kind of opportunities are popping up around the states of Kansas and Missouri.  The best way to do that is to join our email alerts.  That way as soon as some good deals come on the market you can become aware of them.  You will receive information only clients of Rural KC are privy to.  And soon we will have a password protected website where you can monitor activity yourself and keep up to date.

What Are The Next Steps?

Email us or contact us with any questions.  Also, if you happen to be in or visiting the Kansas City area, set up an one on one appointment with us.  There we will get a better understanding of what it is you're trying to accomplish.  

A good idea would be to request a Cropland Investment Profile.  We would send you a sheet to fill out where you can tell us exactly what you're looking for and the best way to pass this info off to you.  We in return would send information on any properties that match what you're looking for to you.  Just fill it out and send it back to us.

If you need to finance a cropland deal you should contact lender who is familiar with cropland real estate.  We can recommend some to you.

Finally, find a rural broker you have confidence in.  They should be experienced in cropland marketing.  They should represent you not the seller.  They should not be geographically limited.  If you find properties let me investigate it for you.  Rural KC can do all of that for you.

Our Services

We will identify potential parcels for you to purchase.  We identify potential tenant farmers.  We help you negotiate lease terms.  We handle the purchase contract and negotiations.  We help inspect the title report.  We assist in determining any applicable government programs.  We can identify other professional support such as crop insurance, financial advisers and farm managers.  And we would do all of this for no charge.  We are your buyers agent.

Results

Now this can be one of three things.  You could have found this blog post informative and interesting, You may want to schedule a meeting with us or this has been five minutes of your life you'll never get back.

Unique Midwest Opportunity

A Unique Opportunity

We at Rural KC truly believe we live in the hot spot of cropland.  Right along the Kansas Missouri border.  Eastern Kansas and Western Missouri present special investment opportunities.  These two states are currently undervalued as compared to their productive capability.  Missouri in particular offers two advantages for first time cropland investors.

Missouri has a culture of cash rent as compared to a share crop culture such as Kansas.  Missouri also has a free capture on water for irrigation.  That means any water on, borders or adjacent to the property can be use for irrigation.  In Kansas you have to get permits to use water and usually you have a limit in the amount.

However, for the more seasoned and aggressive investor, Kansas may be the one for you.  Share cropping is the norm in that side of the border.  If you feel comfortable enough and willing to take the risks, Kansas provides that option to you.

The Efficiency of Farmland

Let's compare Iowa to Eastern Kansas and Western Missouri.  In Iowa per acre you can get 280 bushels per acre with a rent of $450 per acre.  That would make your return on investment 4.5% at a per acre cost of $10,000.  Now let's compare that to Kansas/Missouri.  You would get 170 bushels per acre with a rent of $110 to $350 per acre.  That would bring in a return on investment of 4% to 5% at a per acre cost of $5,000 to $2,500.  Based on comparative production of bushels, per acre cost in Eastern Kansas and Western Missouri would be $6,072.

Common Mistake

There are many things we hear over and over again in our industry from buyers.  But by far this is the most common thing we hear.  "I had a chance to buy that for $_____ back in _____ and didn't do it.  I'm still kicking myself."  Do yourself a favor, don't be that guy.  We can help you avoid that.  Call us at 913-837-4665 or email us at info@ruralkc.com.

Should We Be Concerned About A Bubble?

What Causes Farmland To Drop In Value?

Farmland rarely drops in value.  It has, on average, gone up in value by 3% to 5% each year.  Recently it has jumped as high as 25% per year.  This has raised a fear of a bubble much like what happened to the housing market.  Will farmland continue to rise 25% per year in value?  No.  Odds are it will go back to normal rates and raise in value of 3% to 5%.  In the past 100 years farmland has dropped in value only three times.

First time was the great depression.  Everything fell then.  Nothing in this country was safe.

The second time was 1980.  It dropped five years straight.  The reason was farmland was driven mostly by debt.  Much like the recent housing market collapse was driven by debt.  Also. during that time we put a trade embargo on Russia.  Commodity prices dropped due to this.  So the combination of debt driven land and the Russian trade embargo led to this drop in value.

The third time was 2008.  That due to fear from what happened at the beginning of the recession.  That only lasted one year.  Since then value has skyrocketed because many investors looked to safer investments to the stock market.  So land was being bought cash and rarely bought with credit.  The charts below explains this well.

Let's compare farmland to another popular asset.  Let's take gold for example.  You hear about how gold is the way to invest.  One issue is, what is gold if everything does collapse?  Pretty much a paper weight.  Farmland is something useful.  Because, no matter what, we are always going to have to eat.  Since 1919, farmland has cost approximately 2.4 ounces of gold per acre.  This year, the ratio nationwide is 1.6 ounces per acre.  I'll leave you with a couple quotes that back up this claim.

"The time to worry is when debt financing on farming is growing more rapidly than prices, and we aren't there yet."  David Merkel.  The Economist.  April 10, 2011.

"Land Bubble?:  There is data circulating that "78% of Iowa farmland is now owned debt free."  The data is from "2012 Iowa Farmland Ownership Survey."  From my perspective this decreases the amount of land that will be sold in panic if crop prices drop or profitability tightens.  Further backing up my belief that we are not on the cusp of bursting the so called "Land Bubble."  Van Trump Report June 11, 2013.

"Unlike the last bust of the 1980's, farmers' debts are also low relative to their assets.  Fertile land is not a crowded trade.  Managers say they believe that less than 1% is held by institutional investors, with cash rich farmers bidding for the rest.  In some states such as Iowa, institutional ownership is banned."  The Financial Times May 2013.

Managing Risk On The Farm

How do you protect and maximize your investment?  There are two ways we like to help you do that.  You can outsource the management of your farm.  Or you could utilize crop insurance creatively to protect your investment.

Consider A Farm Manager

For a fee, typically 8% to 10%, a farm manager can make sure your farm is operating at an optimum level.  They can determine the best lease arrangement for you.  They can negotiate the farm lease for you.  A farm manager can oversee your tenant farmers usage of your land.  They can put together a projected investment analysis.  They can assist in tax strategies.  A farm manager can determine value of government farm programs.  They can assist you in a succession plan.  They can collect the rental payments.  A farm manager can pay farm related bills.  They will also work in different lease options such as cash rent, share crop or custom farm leases.

Crop Insurance

How does crop insurance work?  It'll insure a fixed volume of grain or revenue for your farm.  It starts with a historical farm yield record.  Typically over ten years.  The insurance will be a percentage of that historical yield.  

Let's do an example.  Let's say 100 bushels is the 10 year average of the farm.  You choose an 85% coverage.  You can choose anywhere from 55% to 85% coverage.  Thus 85 bushels is guaranteed.  Now, let's say 2012 you got a 50 bushel yields.  2012 was the worst drought we've had in the Midwest in fifty years.  Your insurance will pay for 35 bushels.  85 was guaranteed when 50 were harvested.  So you take 85 minus 50 to come up with the 35 bushels.  You would get payed $280 per acre assuming an $8 market price times 35.  Then you would add the 50 bushels at $8 is $400 per acre.  The total revenue would be $680 per acre.  Basically it's the market plus the insurance.

Is it more complicated than that?  Sure.  But I didn't want to hurt your head too much and my capacity for math only extends so far.  As a matter of fact, I try to stick to doing math monkeys can do.

Crop Insurance Is A Landlords Tool

This will help you keep track of how your farm is doing.  It will be a third party hard copy record of the farms production history by year, crop, acreage and yield.  It's a useful tool for income projections and land values.  It can be a measurement of the tenant's performance.  It's added security, tenant oversight and surveillance.   Remember, insurance fraud is a crime so it'll help you from being taken advantage of.  It backstops grain marketing.  Finally, it's an added loan security and guarantees cash flow.

What's In A Farm Lease?

What Does A Farm Lease Look Like?

With all that info about different kinds of farm leases I realized I never talked about what is in an actual farm lease.  A farm lease tends to be in multiple years.  Three years typically.  The reason for a multiple year lease is there is no time wasted in year to year negotiations.  And a farmer is more willing to improve the ground if he knows he has the land over the next couple of years.  If you do a year to year lease you run the risk of a farmer abusing the land to get as much out of it that year alone and not worrying about the next year.  

The lease tends to have two different forms of payment plans.  It'll have it all upfront at the beginning of the year or it will have half before planting and the other half after harvest.  Most investors like the all upfront for obvious reasons, but if you trust your farmer you may want to give him a break and do half before planting and the other half after harvest.

We highly recommend a written lease.  That way no one can suddenly come down with a case of amnesia and say they didn't agree to something.  It keeps everyone straight.  However, verbal agreements are common in the farming industry and are legally binding.

Check out the sample below of what is a typical written cropland cash lease.

If you would like more examples of share crop, cash rent plus leases one or wish to talk to us about any cropland issues don't hesitate to email us at info@ruralkc.com or call us at 913-837-4665.

Different Ways To Lease Farmland

How Involved Do You Want To Be?

There are four ways you as an investor can be involved with the farmland operation.  You can do direct farming which means you are the farmer and you handle everything involved.  You can do custom farming which you don't farm but you take in all the profits.  You can share crop which you share the profits with the farmer.  Or you could just do traditional rent where you would just be a landlord.

What Is Custom Farming?

In custom farming you do everything but farm the land.  You provide the land and management.  You provide the inputs which includes seeds and chemicals.  The farmer would provide the equipment and labor.  You would pay the farmer a lump sum and optionally a percentage of the profits.  You will get all the profits here.  You get all the tax benefits of being a farm operator.  You can take advantage of any government programs available.  You don't have to worry about any expensive equipment cost.  However, you do shoulder all the risk.  For example, if the crop is bad you're the one who suffers.  Remember, the farmer gets paid a lump sum.

What Is Share Cropping?

In share cropping you provide the land.  You may pay part of the expenses.  For example, we will assume you agreed to a 1/3 2/3 crop share.  So you would pay 1/3 of the chemicals.  You would then get 1/3 of the crop income.

The farmer would provide the equipment and the labor.  He would pay 2/3 of the chemical costs.  They would pay all the seed costs and all of the fuel costs.  The farmer would end up getting 2/3 of the crop income.

What Is Cash Rent?

Here the farmer agrees to pay a specified rate per acre regardless of the crop yield.  The advantage of a cash lease is it's predictable and easy to manage.  The disadvantage is that when the prices are high you may be getting less than the value of the land warrants.  

What About A Hybrid Cash Lease?

Here cash rent would be set at a base rate regardless of the crop yield.  A bonus is paid to you if prices hit a certain agreed upon level.  For example, base rent is $125 per acre but corn hit $7.50 at a given date an additional $25 per acre is due.  Or you are given a base cash rent plus a share crop bonus if production is high.  The advantage is it protects your investment if the prices go up.  Disadvantage is it may discourage some farmers from competing for your land.  It may also cause some farmers from paying a high base rent.