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.
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:
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.