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!

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.

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.

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.