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.