Farmers need to weed out subpar land when negotiating cash rental rates, Wells Fargo Economist Michael Swanson has long argued (see the recent Minding Ag's Business post https://www.dtnpf.com/…).
Now research by the farm management software firm Granular reconfirms what financial advisers have suspected: Renters don't discriminate enough between superstar properties and the laggards that underperform.
That lack of discipline means some producers consistently pay a wide range of rents for land with similar yield potential, according to a benchmarking study by Granular's Mike Preiner. In one Midwest grower's case, Preiner found that the operator paid about $250 per acre for fields with expected yields of anywhere from 100 bpa to about 225 bpa (see chart). Likewise, for fields with expected yields of 180 bpa, the grower paid $100 per acre on the low side, to about $325 per acre on the high end. Preiner based yield potential on 20 years of actual yield history.
"What we realized is a lot of farmers really aren't paying more for better ground and paying less for worse ground," Preiner says. In fact, "there is essentially no relationship between total rent and expected yield."
Granular also found that most operators charge landowners a similar price for all the land they own, regardless of quality.
The bad news in today's economic climate is that means some fields aren't even close to breakeven. The impact of yield differential on cost of production is pronounced, Swanson has said, sometimes leading to about $1 per bu. difference in corn cost of production on typical Indiana farms.
Some cash rent distortions can be explained by "sweetheart" deals with grandparents and family members versus professional farm management firms that tend to charge on the high side of rents.
It's tough to figure out a fair market price, as growers must compete with aggressive neighbors willing to bid to acquire new ground. Once lost, the current operator may not have a chance to recover it. But Preiner advises farm operators to base cash rent by the bushel.
By that score, the operator in Preiner's study paid one landowner over $2 per bu. in rent, while another received 50 cents per bu. Altogether, the 45 landowners averaged about $1.40 per bu. of corn.
"It's an easier way to think about things--how many dollars per bu. should I pay in rent?" Preiner says. And it keeps landowners on a more even keel.
Follow Marcia Taylor on Twitter @MarciaZTaylor
© Copyright 2016 DTN/The Progressive Farmer. All rights reserved.