At this pivotal point in American history we are seeing political unrest, a volatile economy, a less than cooperative business climate, and as a result unbelievably high commodity prices. So what does this mean for the land owner and their production ground? It means it’s time to raise the rent on that Ag lease!
For our clients here at Ranch Resources we work diligently to insure that they are receiving the most competitive agreements available in today’s markets. We pay close attention to commodity markets, farming costs and any inputs that may affect the value of the lease on their property. There are two roads of thought that, depending on the interest of the client and the amount of risk they are willing to take, they can pursue.
The first road is the crop share. This is typically a straight forward agreement that splits the production proportionately between the farmer and the landowner. The ratio varies depending upon different crops and what each party provides such as irrigation equipment, electrical fees, etc. We have clients who enjoy shouldering this risk with the farmer and like having the involvement in the selling of their commodities. We work very hard at marketing our client’s commodities, looking for any angles that give premiums over base rates. Because of the recent spike in commodities such as wheat and hay we have been sending our clients some very large checks this year.
Cashing in on the high commodity prices doesn’t always require a crop share agreement. Many of our clients prefer to take the safer route, limit their risk and embark on the second road, the cash lease. This is where having a knowledgeable staff working for you doing the full due diligence and keeping close tabs on market trends is vital so that the lease can accurately be priced. A cash lease allows the landowner to lease the full farming rights to an individual in exchange for a specified sum of money. Putting monetary values on acreage is not easy and the factors that play into the equation can be many.
Recently I negotiated a lease for a client that involved multiple aspects, and in my opinion this is a good thing. It is not always just the dollar figure that is reflective of a good deal. I look for other avenues such as improvements to the land, aftermath grazing, water fees and electrical bills that I can use as leveraging tools to successfully negotiate a deal. I begin the process by looking at the three year history of the property. If this is possible I like to calculate a by acre value based solely on gross production. I then take a 25% share of the gross value per acre and figure out a quarter share of the revenue for one year. I do this three times and then average the three year trend to get a lease value.
Often in a crop share lease, the landowners share is 30% of the production. This is a higher percentage base than the 25% value for the cash lease because there is risk involved on the landowner’s behalf. This may or may not payoff depending on annual production and market values.
With the 25% average I then take a look at the ground and decide on whether or not any improvements or farming are necessary in the next three years. Here is where having the relationship with your farmer and being able to communicate effectively is crucial. That is one of our responsibilities at Ranch Resources and we take it very seriously. We have been doing this for nearly twenty years and this is where we earn our keep. If there are opportunities to improve the structures on the property or increase production we take a hard look at what that does for both parties and adjust our lease value accordingly. To do this successfully you have to take into account the cost of the improvement and who is benefiting from it. If the landowner pays for an improvement that is at the sole benefit of the farmer and the lease value does not compensate for this investment then the landowner is being taken advantage of.
It usually takes some going back and forth before a deal is struck. Farmers are nothing if not frugal which makes them great negotiators. What is important is to also have a good negotiator batting for your team.
Negotiating an Ag lease is not a quick or simple task. It should be a process that starts with gathering the facts, then discovering all the options and negotiating tools, and foreseeing the potential in the future markets. We eat, sleep and drink our client’s best interest at Ranch Resources and we don’t rest until they are fully satisfied with their operation. Owning production ground should be enjoyable, and by hiring Ranch Resources, we do the tough jobs with as little or as much involvement of the clients as they wish.