Using The USDA Cash Rent Surveys for the “Going Rate”
The number one question I receive into my Extension office is, “What is the going rate for cash rent?” Most owners are seeking an average to charge a farmer for the use of the land per acre for one year. One of the problems with this approach is that many landowners really don’t know whether their farm is below or above average for the area.
Cash Rent levels for a farm are determined by supply and demand. Landowners are sometimes uncomfortable with advertising and negotiating rent in the open market. Often, the landowners want to keep the current farmer to avoid the uncertainty and potential stress of contracting a new tenant. In this, the landowner may look at leasing surveys to establish a rental rate.
Average Cash Rent
One of those is from the United States Department of Agriculture which surveys farmers and landowners to establish what the county average for rent per acre is. The key point with this survey is that responding to the survey is voluntary and not verified. As a farm manager, I find these surveys to:
- Be lower than the actual market place
- Only list the” average” for the county
- Include less than arm’s length transactions
- Not be representative of the “going rate” for land that has recently come on the market
The landowner can to some degree account for how their farm compares to average by comparing the average yields on the farm to the average yield for the county. The average yield for each year is released in February of each year following harvest. The average cash rent per year is released in August during the production year. If your farm constantly outperforms the county average, then your cash rent could then be established above the county average.
As an example, assume the if the county average cash rent is $300 per acre on the USDA survey, and the average yield is 200 bushels per acre. Also in the example, your average yield is 220 bushels per acre for the past four years. You can deduce that your rent should be higher than $300 per acre. If your farm is “on the market” and available for all farmers to offer a price for rent, the landowner can assume a higher rent can be attained.
Farmers understand their risk should yields or grain prices move downward. Farmers can protect against revenue loss should yields or prices decrease by purchasing Federal Crop Insurance that protects their revenue from downside risk. Landowners with a fixed cash rent are vulnerable should yield or price increases occur during the growing season. If farm revenue goes up, since the lease rate is “fixed,” the owner does not gain revenue from the increased farm profits.
There are several factors that go into cash rent levels. Generally, “average” cash rents per acre are slow to adjust to market conditions. The biggest factor is supply and demand for the land. In today’s market, there is a lot of competition for the right to use your land to grow crops. Still, the higher the cash rent requested; fewer farmers will be willing to pay. Think of it like selling a car or renting out a house. The higher the price, the fewer people are willing to pay that amount.
Let's look at a formula farm managers often use to determine cash rent.
In this formula, you as the landowner need to know what the average yields for your farm are going back in time. Minimally you will need three years. Up to ten years of yield data will be even better.
Once the average yield has been determined, the next step is to choose a multiplication factor that you are comfortable with. For normal arm’s length transactions, this factor ranges from 35% to 38% on corn and 40% to 44% on soybeans.
The factor is the amount the landowner will capture of the estimated revenue that the farm will produce using yield times estimated grain price per bushel. This factor can be less for relatives or other special relationships between the farmer and the landowner. Some lease arrangements are higher but not common. The top end is sometimes 40% on corn and 45% on soybeans but is not common.
Per Bushel Price
Next, a per bushel price needs to be determined. The USDA estimates the average price expected for the coming crop year. Price estimates on fall delivered grain prices for the coming year that can be contracted for while still in the current prior year at your local elevator. In other words, prices are already being offered at harvest time for this year’s crop for harvested grain in the coming year’s crop. At the end of February each year, Federal Crop Insurance minimum price guarantees are determined based on grain market if the landowner want to wait that long.
Assume the landowner and farmer are negotiating cash rent for the coming year in late November after harvest.
- The local elevator is offering $5 per bushel of corn for fall delivery of the next year’s crop.
- The owner has determined the average yield on the farm is 200 bushels per acre.
- After consideration, the landowner offers a 38% factor (estimate of generated farm revenue) and the farmer counters with 35%. They reach an agreement at 36%. Below are the calculations.
- 200 bushels per acre x $5 x 36% = $360 per acre cash rent
- assume an average yield of 70 bushels per acre.
- The USDA is estimating soybean prices to average $14 per bushel for the year.
- The negotiated revenue capture factor is 42%.
- 65 bushels per acre x $14 x 42% = $382 per acre cash rent
In negotiations, you may want to consider averaging the soybean and corn rents together or prorating the crops by the percentage of your farm in each crop.
These calculations put a formula behind the numbers for cash rent.
No method is perfect. To protect themselves, farmers can purchase Federal Crop Insurance which does greatly reduce their risk in adverse market or production conditions. In a flat cash rent, the landowner accepts upside risk should yields and grain prices greatly increase.
Disclosure: The author is a licensed real estate managing broker in Illinois and manages farms.