TAKE A LAND RENT OPTION SURVEY

in Indiana Prairie Farmer, August, 2008, page 44.

By Tom Bechman (revised here by Howard Doster to define contribution margin & July prices.)

KEY POINTS

Tenant takes no risk in custom farming arrangement.

Tenant assumes all risk if you cash rent, and you expect more reward.

Other options split up risk and reward between tenant and owner.

How much do tenants or owners want for taking risks today? How much risk is either party willing to take? Howard Doster, an independent farm management coach, wants to find out. Doster assembled a survey example, and hopes you’ll make choices and return answers. If he gets enough response, he’ll summarize results.

Here’s your chance to let your opinion count. Think through the example, then, follow instructions below.

SURVEY EXAMPLE

In a crop budget, Doster says contribution margin is expected revenue minus variable costs. Thus, contribution margin equals tenant margin (returns to tenant) plus owner margin or rent (returns to owner). If you know any two, you can calculate the third.

Futures price changes caused the 2009 contribution margin to vary by $78 in July 08. Suppose the 2009 contribution margin in the February 09 Purdue University Crop Guide for a timely typical tenant for average soil corn/bean rotation is $436, which is also where it was in February 08 Crop Guide for 2008 for 157 bushel corn and 49 bushel beans. You could farm another 80 acres, although your last plant/harvest yields will be under your average yields.

An owner with 80 acres of average land also uses the $436 contribution margin in his benchmark budget. He asks prospective tenants to make offers based on four options, varying in responsibility and risk to each party. (Tenants make their own budgets based on their expected performances. Tenants don’t show their budgets to an owner.)

Option A. Custom farming. You have no risk as tenant. Figure what you will accept to custom farm a corn/soybean rotation. What would you charge per acre? ________.

Option B. Cash rent. As tenant, you take all the risk. What’s your bid per acre? ________.

Option C. Constant tenant margin. What’s it worth to know your margin will remain the same next year as this year? That can happen if the owner has incentive to subtract your tenant margin from this year from his next year’s benchmark budget, again based upon February Purdue Crop Guide contribution margins, to arrive at next year’s cash rent. Until the lease is terminated, you won’t need to rebid. Increase your previous bid (Option B) to account for this value. What’s your new bid per acre?________.

Option D. Outside the farm gate adjustor lease. If you’re a tenant and don’t want to take current outside-the-farm gate buying, selling or production risks, bid high enough so an owner capable of taking risks but not wanting responsibility associated with custom farming will choose this option.

Here, the owner takes the risk of changes in variable costs and government direct and counter-cyclical program payments until Purdue’s Crop Guide is published each February. He/she also takes outside the farm gate risks in yields and prices.

Prices could be averages from a pre-agreed elevator on pre-agreed dates during harvest. Yields in the owner’s benchmark budget could be adjusted by the percent change between county expected trend yields and actual USDA-reported county yields.

As tenant, you are responsible for your inside the farm gate performances. Your main risk as tenant will be that your yields could change differently from actual reported county yields.

This lease is current as of harvest each year, and your tenant margin remains the same in future years of the lease, as in Option C, except the cash rent is calculated after harvest, not in February before planting.

The owner bears extra risk here. What’s your new bid per acre? __________.

REPORT YOUR BIDS

Learn more about Howard Doster’s options at www.DHDoster.com .

To participate in the survey, simply report your A, B, C, D bids by calling him at 765 412 1495 or emailing at Howard@dhdoster.com

Remember, this is just an example and your bids will be confidential.

Look for more information in upcoming issues.