My Rent Blog
Howard Doster
2/08/08
Trained
as an economist, I observe how persons trade with each other and predict how
they will trade.
No
tenant will start to plant a crop unless the tenant thinks he/she will more
than recover costs, from now on. My definition
of marginal cropland is that land where a tenant expects to just cover his
opportunity costs, at zero rent.
For
at least the last two hundred years, economists have noted that tenants tend to
bid expected excess returns into land rent. Because of the differences in
tenant productivity, superior tenants need bid only what typical tenants can
afford to bid, and inferior tenants must subsidize
their rent or exit the industry. That’s my summary of the way persons trade in our market economy.
Just
as in the early seventies when crop prices increased faster than non-land crop
costs, many tenants with rents that lag will lose their leases in 08 and/or 09.
I
said rents were too high in July 06 while speaking at the Purdue Top Farmer
Crop Workshop. Why? Citing the January
06 Purdue Crop Guide, I noted the expected returns to resources, the tenant’s
resources plus the owner’s land, were $152.
Craig Dobbins, a Purdue Ag Economist, had just reported that the average
rent in his June 06 survey was $134, leaving only $18 as the tenant’s
margin. However, perhaps some tenants
saw before I did that the ethanol demand for corn was coming. Although corn and
bean prices were below loan on Labor Day, during 06 harvest,
they both increased about $1.40 per bushel or $135 per rotation acre! Adding $135 to $18 increased the 06 tenant’s margin to $153.
”WOW! That’s not sustainable”, I started saying in
the Farm Press last winter. “Rents will increase. Tenants, if you’re ever going to increase
your rental acreage, do it now. If you
don’t want to outbid your neighbor, rent further from home. Just do it, while you can make yourself and
the owner better off.”
On
2/08/08, still using a $.25 corn basis and $.30 bean basis, 08 budgeted returns
to resources, called contribution margin, for the typical
I know the budgeted contribution margin increase was $297 yesterday. But, some things are not knowable. I don’t know whether or how much budgeted contribution margins will increase or decrease before you read this paper, or harvest your 08 crops.
Do
you want a rent that’s current or a rent that’s typical? Reported average rents increased a record
amount in the June 07 survey. I predict
reported average rents will increase by a new record amount in the June 08
survey; and, guess what, the average rent will lag
further behind an equilibrium or right rent in 08 than in 07. And, laggard tenants will lose leases again.
I
do know a tenant can create a constant tenant margin for 08, 09, etc, or until
either party decides to terminate, by using my cash rent outside-the-farm-gate
adjustor lease. That’s why I call it a
“relationship” lease. By paying the owner enough more base rent to cause the
owner to take the risk of changes in outside-the-farm-gate yield and price in
the current year plus changes in government payments and variable costs in
future years, a tenant can lock in his/her tenant margin in the lease while
getting 100% of his/her inside-the-farm-gate performances. In this lease, the tenant takes more risk and
responsibility and can expect more returns than for doing custom work.
I
do know I created this lease in 1997, and wrote a Purdue publication describing
it in 1998. Now retired and an owner
with this lease in 07, I realized $50 per acre more than my brother who had a
crop share lease with the same tenant, and $150 more than our cousin with a
non-current cash rent lease with a different tenant on an adjacent farm, all
with the same soils. Again this year, my tenant’s yields were above my lease
budgeted yield. That’s great! He benefits from his outstanding
performances. I picked him because he was the best tenant I could find. It’s easier to divide a big pie than a small
one.
Perhaps
you want to consider using my relationship straight cash rent lease. With it, once you agree on the cash rent, and
thus the budgeted tenant margin, you can keep your rent current as of the date
of the current year budget, almost automatically, from now on.
For
details,
See
my website; www.DHDoster.com ; email, Howard@DHDoster.com ; phone 765 412 1495