USE A RELATIONSHIP LEASE
TO KEEP YOUR RENT CURRENT, FROM NOW ON
D Howard Doster 2/5/08
An owner decides how and to whom he/she rents the farm, but the owner has to find a tenant that accepts his/her rent terms.
The only reason a tenant and an owner would sign a lease is because, they think, they are better off than in any alternative use for their resources; for a tenant’s labor/management
skills & his/her machinery resources to produce & market crops, & for an owner’s land.
Somehow, tenants and owners estimate their opportunity cost for using their resources elsewhere before making/accepting a cash rent bid. In the next few paragraphs, I’m going to share how to keep a rent current, once both parties decide it’s right.
To me, the return to resources is called contribution margin (CM).
The return to the tenant’s resources is also called tenant margin (T M).
The return to the owner’s resources is also called cash rent (CR).
Mathematically, this equation can be written as CM= TM + CR.
It can also be written as CM-CR=TM, and CM-TM= CR.
Thus, if you know any two, you can calculate the third value.
I use this equation to keep a cash rent current, from now on,
until either party terminates the lease in a timely fashion. Here’s how.
The owner finds a third party crop budget. I start with the contribution margin (CM) in one of the budgets in the Purdue Crop Guide as my benchmark budget (BB). It’s posted on their Ag Economics website at least annually.
I subtract an acceptable tenant’s cash rent bid (CR) from my CM to find TM.
Once I calculate TM, I subtract it from a future budget CM, calculated by the same rules as my original BB, to arrive at CR for the future period. It’s that simple.
Take the time, make the effort, to learn and do this. Until either party terminates, you have a lease that’s current as of the date your third party current BB is calculated. Your third party CM is net of expected representative government payments plus crop revenue (yield x price) less variable costs, outside-the-farm-gate. Create and carry out this stress-free relationship straight cash rent lease, almost automatically, from now on.
The above math is simple. How well does it represent real life to continue to use the same CM from year to year until either party decides to terminate? I’m satisfied. The tenant gets a constant TM for the use of his/her resources; the owner gets the residual return to his land. Trained as an economist, I think that’s the way the rent market works, given enough time and stress for the tenant traders to bid excess earnings into rent. In this lease, I do the adjustment at the beginning of each year. If you agree, use it. If not, don’t.
As a tenant in 1997, I helped my owner create another relationship cash rent lease. It’s similar to the above except it’s adjusted to current outside-the-farm-gate yields and prices as of the current year harvest. Now an owner using the same type lease in 07, I received $50 per acre more cash rent than my brother received from the same tenant, but with a crop share lease. Oh, I received $150 more than my cousin from a different tenant with a non-current cash rent lease. The three farms adjoin and are the same soil types.
In my 08 BB CM as of today, because crop prices have again increased more than non-land crop costs, I will likely receive more rent in 08 than in 07. And, the difference in rent on these three farms likely will be more in 08 than in 07; but, I’m taking the risk of outside-the-farm-gate changes in yield and price, from now on.
My tenant, a superior operator, gets 100 % of his inside-the-farm-gate performance, and he always outperforms my BB. That’s great. And, he takes more responsibility, growing whatever, whenever, and gets more return than if I hired him to custom farm. I get a rent that’s current. Because I’m taking the outside-the-farm-gate government, cost, price, and yield risk, I get a higher than straight cash rent return to my resources. My tenant also knows that he’s not stuck with a high cash rent in a year when contribution margin drops after the lease is signed.
Contact me, & my wife, Barbara, both retired Purdue management teachers, for details.
Ph 765 412 1495; web WWW.DHDoster.com ; Email Howard @DHDoster.com
We teach for free and for fun.
When you pay us, you learn more, we work more, and we all have more fun.
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