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Senior Contributor

Question I couldn't answer

A young neighbor came to me today and asked me a hard question, it was this. He told me he had been renting the 80 to the south of me for five years now and the rent had never been raised. Every year he would wait for a letter to come and nothing. So his question was should he raise it on himself. He told me he is by no means making a lot of money as he is not a huge farmer and started from next to nothing, which I completely agree. I told him I would probably raise it on myself but I don't have to pay his bills. What are your thoughts.

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13 Replies
Veteran Advisor

Re: Question I couldn't answer

What kind of relationship does he have with the owner? If it is on good terms, I would probably offer him a bonus of some sort, with the understanding that if prices tanked, it could be adjusted down. If the owner is a good guy or gal, they will probably appreciate his honesty.
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Senior Advisor

Re: Question I couldn't answer

Both parties ought to make an honest dollar on the ground.  It might be worthwhile to negotiate a reasonable basis for arriving at the rent so it always stays in line.  That the rent hasn't been raised in five years makes me wonder if the owner is aware of the current rental market.  If she/he isn't, it might be  a big shock when ever the eyes are opened.  Not opening a dialogue, to me, means that when the facts of life are determeined the current tenant is likely to be persona non grata for not being up front.  The owner may feel ripped off (even if it is no one's fault but his/her own).

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Honored Advisor

Re: Question I couldn't answer

We have only rented on cash rent basis, and that has not really for row crop/ supported crops, only hay. That said, I try to trend up rent a little notch every few years, if for no other reason than that property taxes go It is kind of dangerous to base the foundation cash rent on today's prices, unless there is some way to also scale it back if (.when) the present party is over. Maybe come up with a way to calculate in a bump for production x commodity price, and itemize that factioring for the landlord, in a letter with the rent check. This is either a landlord with no clue, or one that has decided to work with a young guy to get started. Either way, it sounds he's got a conscience issue going. Being fair benefits both parties to the deal. He needs to consider how he can afford to do that, without overcommitting himself. There needs to be a win- win position that allows him to insure that he won't lose the place, or money trying to farm it, down the road.
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Veteran Contributor

Re: Question I couldn't answer

I rent alot of ground and he definately needs to have a better dialogue with his landlord. He could find himself with a notice 1 Sep and lose the farm. I've seen it happen alot. In fact last summer a landlord asked me what was a fair rental rate I thought his farm would be worth. I told him if you want top dollar put it up for rent in the paper and I explained to him how I work with my landlords. We sit down and look at costs, I show them soil tests and what I spend for fertilizer  and arrive at a fair price. I also don't have a problem with giving a bonus if prices/yields warrants. Believe me that goes a long ways in securing a relationship. He told me to see him next fall. Now its possible this persons landlord is completely satisfied. I have one landlord that told me we should raise the rent but I just have to pay taxes on it anyway. Hopefully thats the case. You don't know if you don't talk with them. I've learned to never assume anything when it comes to land.

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Advisor

Re: Question I couldn't answer

Better to be proactive than to do nothing and end up getting a surprise letter telling him the land's been rented to someone else.  He needn't raise if by much, but should offer something.  Though it may be a tough thing to do, financially, I believe in the long run this will improve his standing in the mind of the landlord.

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Senior Contributor

Re: Question I couldn't answer :More news

 Talked to my young friend again today and he told me flat out what the rent was. My jaw dropped, it is fair now and when it was rented five years ago it would have been in the top 5% as far as price. I told him open a dialogue with the landlord, but its very possible that it hasn't been raised because he is doing and has been doing well. We also talked a little about his situation he is not a BTO and I think he is paying BTO cash rent for his ground. But he explained to me there is no other way. Man do I feel bad for the 40 and under crowd trying to make it and get a start in farming. He actually thinks that a drop in commodity prices might help him get a little more ground, I don't see it that way. But I been thinking about this all morning, its sad a guy cant get started and raise a family farming anymore.

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Senior Contributor

Re: Question I couldn't answer :More news

The first problem is that landowners think they deserve a cash rent.   Why the hell does the land owner need to make more then the tennant anyway.   Thats part of the reason we have outside investors because farmers went to cash rents.  

I have heard the pharse "i just don't want to mess with the farming end of it anymore" from the land owners,  meaning selling crop, buying inputs and what not.  The fairest rent is a crop share,  then I hear the arguement that the land owners brings more to the table.  Someone should price new machinery then.   Not to mention what the tennant brings to the table will literatly rust away with time, unlike a farm owner where the land will be there with proper care. 

the tennant could help his rent boss out.  One land lord I had once I bought the stuff then bill him for it later, that way we both got the volume discount.   

 

IF YOU DON'T WANT TO "MESS WITH THE FARMING END OF IT" WHY DO YOU WANT TO OWN THE FARM TO BEGIN WITH? 

 

And I'll tell you why some fool thinks he can pay more then he makes off of an acre for it in cash rents, just for the title of BTO.  

the article that lead me to this post quoted Farmers National company,   I would NEVER listen to what those guys say. 

 

And another thing since I'm on my soap box,

 

If the farm implement dealers wouldn't keep pushing this bigger equipment down our throat with bigger price tags all the time, cash rents wouldn't be so crazy either, cause the cost per acre could be less.  

 

To answer the question about raising your own rent. I'm going to raise my own on some pasture ground since the landlord is doing some things to improving it, and I'm getting a fair deal. 


Tell the guys this, farming for exercise isn't that much fun,  you need to make money at it.   

 

 

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Senior Advisor

Re: Why oh Why?

Please consider.

 

Landowners are not running a charity. They are in it to make money, just like the investor that buys stocks or a business down town or rental properties. Would you sell your corn for $5 if the market was paying $7?

 

I prefer hiring the custom work done. I pay satisfactory rates for the work and i maximise my profits. That eliminates the risk for the tenant and I get most of the reward. Is there something wrong with that?

 

I really don't know why more retired farmers don't do that. The custom rates are significant but they are all expensed on the 1040. If you are profitable you get as much as 35% discount from the IRS. Probably less costly than owning the machinery and the accompaning repair bills. Don't forget that all the labor is furnished by the custom operator. Plus I don't have to budget for machinery replacement.

 

Why do i want to own the farm? Because it is a good investment throwing off substantial income and exceptional land appreciation.

 

Machinery dealers push larger equipment because there is money to be made selling. They sell the tools that may make farmers more efficient and enable them to do more in less time. It accelerates the expansion that most farmers want to do. WHY? because farmers know that expansion invites the efficiency of scale. They are making money and that is why land is so high and rent is high. Competition has driven those costs higher and most any business needs to compete.

 

Farming for exercise is not that much fun, that is why you have to manage your operation in an efficient manner. Other guys are doing it and paying high rents and are doing quite well. $1K gross per acre on corn ground pays a lot of expenses and still leaves a profit for you. $600 per acre on soybeans is not as lucrative but is pretty good just the same.

 

My question would be how much margin per acre do you think you earn or deserve to earn?

 

Please don't be offended. I just offered some stuff for you to think about.. Maybe that guy that rents you the ground is doing you a huge favor that he could offer to most anyone else. When i was a tenant, I was greatly appreciative of those folks that offered me the opportunity to rent their ground. I'm sure other tenants feel the same way and yet others think their landlords are greedy bast**ds that don't deserve what they are getting. Nobody forces anyone to sign a lease. You don't like the terms, you don't sign the lease. Somebody else will.

 

 

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Advisor

Re: Why oh Why?

You make some really good points, Kraft.  It is a business that needs to be managed efficiently for sure.  One thing I might differ somewhat, perhaps because of my situation is I as a farmer and custom operator am able to cover acres without a high capital cost.  Since I did not inherit the farm nor any substantial assets, my entire machinery inventory costs less than what two major pieces of new equipment costs.  It is well maintained and operates without breakdowns.  A neighbor and much larger farmer learned I covered XXXX acres at harvest, he said, "that's what we cover.  How did you do that?"  Simple answer; efficiency, well maintained equipment, good help and a well executed plan.  Not to mention, my combine and supporting equipment cost less than half of what his cost. 

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