Farmland--Cash Rent or Share Crop?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

Farmland--Cash Rent or Share Crop?

Postby Clark & Addison » Sun Jul 21, 2013 7:40 pm

My wife has come into some farm land and we need to decide whether to cash rent the land or to go into a share-cropping agreement. We have close family that will be farming the land. What questions do we need to ask or what information do we need to gather in order to determine which is best for us?
User avatar
Clark & Addison
 
Posts: 103
Joined: Mon Jan 14, 2013 1:15 pm
Location: Indiana

Re: Farmland--Cash Rent or Share Crop?

Postby twacapt » Sun Jul 21, 2013 9:08 pm

I have two row-crop farms that I rent by crop sharing. The operator pays all expenses of planting, raising and harvesting crops and keeps 2/3 of gross income. I pay 1/3 of all fertilizer, pesticide and herbicide applications, and keep 1/3 of all gross income. This way I have some say as to how the operator farms the land (conservation, crop rotation, etc). In a cash rental, the owner loses all control over the land. Some operators will only concern themselves with short term profits and leave the owner with depleted soil and a farm that could take years to restore.

The cash flow on a cash rental is predictable and certain. In crop sharing, the income fluctuates from year to year depending on how good the crops do.
twacapt
 
Posts: 153
Joined: Tue Aug 26, 2008 9:42 pm

Re: Farmland--Cash Rent or Share Crop?

Postby TWG1572 » Mon Jul 22, 2013 11:45 am

I also own farmland that I rent to others, but I only do cash rent. As stated, it's predictable and certain. I have no interest in taking on the incremental risk in terms of price fluctuations, weather extremes, crop failures, deciding when I should sell to make the most money, etc. If I wanted to expose myself to higher risk/return I would just have it custom farmed and take on 100% of the risk.

You do not lose control of your land with a cash lease. You need to be savvy enough to write into the cash rent contract all the cultural/soil conservation/risk management practices that you want followed. It's done all the time and is a good management practice. Prospective renters simply need to consider them in the evaluation of what price they are willing to pay for rent. Off the top of my head, I've got the following clauses:

1) Requirement of annual soil tests, which are also submitted to me for review. Tenant is required to annually apply at minimum the amount of nutrients an average crop removes per Iowa State extension publications. Tenant is required to leave farm with fertility and PH levels equal to where they were when then began farming X years ago. Any deficiencies are fixed and billed to them.

2) Required compliance with all USDA soil conservation guidelines and programs. I review and approve any new conservation plans or crop rotations. They are not allowed to remove any conservation structures such as waterways, terraces, or buffer strips. They are also responsible for maintaining them.

3) I take a first position security interest in all growing crops and crop proceeds. I do not release until I have both the Apr 1 and Sept 1 checks in hand. I had a tenant who had cash flow problems and decided not to pay his second installment. That security interest was worth it's weight in gold. Or in this case, corn. :D

On a crop share basis, you will also be needing to chip in on operating expenses. Depending on how much land you have, this could require a pretty sizeable cash outlay or operating line of credit. Do you want to go there? Different areas of the country also have different appetites for cash vs sharecrop. Sharecropping is far more predominant in riskier areas of the country - say the say the southern great pains or the southeast compared to the Midwest.

I'd approach this decision like I would an investment. It's all about risk tolerance, expected return, and how much you want to be involved in the process.
TWG1572
 
Posts: 22
Joined: Sun Apr 10, 2011 8:14 am

Re: Farmland--Cash Rent or Share Crop?

Postby happymob » Mon Jul 22, 2013 11:59 am

It depends on how easy the farmer is to work with. We have a great share cropping relationship with one farmer. He deals with most of the FSA (farm subsidies, disaster payments, etc) paperwork (we gave him power of attorney for this purpose) and we get detailed reports on things. Other farmers will simply "forget" parts of your agreement (who is paying for what percentage of what). It's much less hassle to simply cash rent with some farmers. It's almost certainly simpler, in all cases, to go with cash rent. Income is also steadier as you remove the crop failure risks from the equation (though of course that comes at a cost of missing out on the really great years).

Edit - I suppose mentioning taking advantage of the step up in cost basis and simply selling the land is a reasonable option for many.
User avatar
happymob
 
Posts: 474
Joined: Wed Nov 18, 2009 5:09 pm

Re: Farmland--Cash Rent or Share Crop?

Postby YttriumNitrate » Mon Jul 22, 2013 12:17 pm

Is simply selling the land an option? At least in the Midwest, land prices have had a heck of a run since the early 2000s.

Image
User avatar
YttriumNitrate
 
Posts: 705
Joined: Tue Mar 26, 2013 1:13 pm
Location: Midwest

Re: Farmland--Cash Rent or Share Crop?

Postby Rubiosa » Mon Jul 22, 2013 2:22 pm

In the Mississippi delta the usual arrangement is for the farm operator to pay ALL expenses and take 75% of the gross. The farm owner takes the other 25%. This arrangement seems to work well.
Rubiosa
 
Posts: 269
Joined: Mon May 19, 2008 10:58 am

Re: Farmland--Cash Rent or Share Crop?

Postby MN Finance » Mon Jul 22, 2013 3:40 pm

If you take possession and share crop, it could likely be treated as self employment income and make you eligible to contribute to an IRA or SEP, something a retiree might find valuable
MN Finance
 
Posts: 1206
Joined: Sat Dec 22, 2012 11:46 am

Re: Farmland--Cash Rent or Share Crop?

Postby Dumbo » Mon Jul 22, 2013 3:48 pm

Can it be developed?
Those people who think they know everything are a great annoyance to those of us who do. - Isaac Asimov
User avatar
Dumbo
 
Posts: 58
Joined: Tue May 28, 2013 3:53 pm
Location: Boston

Re: Farmland--Cash Rent or Share Crop?

Postby TWG1572 » Mon Jul 22, 2013 4:23 pm

MN Finance wrote:If you take possession and share crop, it could likely be treated as self employment income and make you eligible to contribute to an IRA or SEP, something a retiree might find valuable


It could also make you "eligible" to contiribute to social security. That was one of the bumps on my road early on. Nothing like a letter from the IRS informing you of money due to ruin your day. I don't remember exactly how I triggered that, but I believe one piece was characterizing my income as active vs. passive.

The key piece that's missing in this discussion is where this farm is located. There is so much variation in farming practices across the US - what works in one area won't work in another.
TWG1572
 
Posts: 22
Joined: Sun Apr 10, 2011 8:14 am

Re: Farmland--Cash Rent or Share Crop?

Postby Clark & Addison » Mon Jul 22, 2013 5:12 pm

Thanks for all your advice. The amount of farmland is not huge, a little under 100 acres (all tillable) in Indiana. We will not sell or develop the land. We have family that will farm the land, we just have to decide whether to cash rent it or share crop it. I know what the cash rent price will be now. I believe with the share cropping, we would pay 40% of the fertilizer (I need to find out if this includes herbicides and pesticides too and what cost this would be) and get to keep 40% of the crop. Do I need to ask any other questions other than average yield of these fields for corn/beans and cost for whatever 40% we would pay? The way I understand it is that the farmers would store/dry/haul our 40% of the crop, but we would have to decide when to sell it.

The cash rent price would increase our current annual income by about 20%. We would increase our retirement savings (currently around 17%) with this additional income as well as invest for our next home. We are currently in our low 30s with a paid for home and a growing family. Once again, I appreciate everyone's advice.
User avatar
Clark & Addison
 
Posts: 103
Joined: Mon Jan 14, 2013 1:15 pm
Location: Indiana

Re: Farmland--Cash Rent or Share Crop?

Postby 64415 » Mon Jul 22, 2013 6:13 pm

I own nonirrigated farmland in the Midwest. I have 1/2 of it custom farmed and the rest I rent to a large well known AAA rated agricultural corporation for $400 per acre. With custom farming you are in effect acting as an agricultural general contractor by paying for the equipment and labor and technical knowledge and skill of the farmer. You are also obviously assuming all the risk.The custom farmed land returned $600 per acre on average last year. For reference, the average farm in Southwest Minnesota according to Progressive Farming magazine had a net income of $375,000 on an average size farm of 883 acres. So this was nothing extraordinary for areas that had rain last year. I grew up on a farm where the emphasis was on livestock production. I have family members who serve as my mentors/ advisors on a lot of the row crop custom farming decisions. This has proved invaluable.

Custom farming is the way to go while grain prices are at all time highs. With respect to capital requirements expect to spend $500 per acre to grow corn, and $200 to grow soybeans. If you don't have the requisite expertise to do custom farming, I would suggest hiring a farm manager to implement a custom farming program for you. I don't use them, but I would recommend Hertz Farm Management based on what I have observed in my state. They charge 10% of revenue and do absolutely everything for you. Think of them as the full service Larry Swedroe type advisory firm, that is full price but very high quality and worth it if you need it because you lack agricultural knowledge. There are some very bad farm management firms out there that will do things like charge you the same 10% of gross revenue in exchange for cash renting your farm for $180 per acre to their high school friend.

You would be better off to sell the farm now while prices are at all time highs than to give the majority of the annual profits away to someone with a very low cash rent or unfavorable crop share arrangement.

Regards, Sebastian
64415
 
Posts: 183
Joined: Wed Jul 01, 2009 9:32 pm


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: No registered users and 20 guests