Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. Following are the questions they are answering this month.
Cash rent rates are sticky issue
A couple of aggressive farmers contacted some of my landowners last fall and offered more cash rent. I still have the farms. Should I be proactive and prepare to offer higher cash rent for 2018? Or should I just let things play out?
Plastina: Being proactive seems like a better plan. However, rather than guessing how much higher cash rents to offer to outbid aggressive farmers, I strongly encourage you to prepare detailed budgets for each of your enterprises in each of your fields (rented and owned). Knowing your breakeven costs per acre on rented ground allows you to calculate the tenant’s residual: the maximum amount of cash rent you are able to afford while covering all costs.
If your current rent is lower than your tenant’s residual, then you can offer a higher rent (up to the tenant’s residual) and still break even. However, if your current rent is higher than your tenant’s residual, you know you will not break even on rented ground.
The next question is whether it makes sense from a strategic point of view to renew the lease. If it does, then knowing your breakeven costs per acre on your owned land will help you figure out how much of your profits on your owned land can be used to cover your losses on rented ground. The final question is whether a higher rent can be cash-flowed.
In summary, being proactive by analyzing your alternatives with profitability and cash flow in mind is better than waiting for a letter from the landowner, and a much better alternative than offering higher rents without a good grasp of potential impact on the bottom line of your whole operation. ISU’s Ag Decision Maker File C2-20 explains how to calculate the tenant’s residual.
Miller: When was the last time you talked to your landlords about the cash rent? If it was set five or six years ago, it may be too low. If it was three years ago, it may actually be too high, since rental rates have been declining for the last three years in most areas.
Ask your landlords if they have any questions about next year. If they ask for more rent, be prepared to show them how a flex lease may make them more money if prices or yields are really high, but will keep you from going bankrupt if they aren’t.
Also, let your landlords know they can talk to your lender about the stability of your operation. You don’t want them to worry about getting paid “like what happens with the landlords who rent to the fly-by-night, high-money cash-rent farmers” (and, yes, you can quote me on this because I have witnessed the worrying). Some landlords believe that they can control that worry by insisting on 100% of the rent upfront. However, if a farmer pays cash rent and takes bankruptcy within 90 days, that cash rent may get pulled back into the bankruptcy, and the landlord could be obligated to rent their farm to whomever the bankruptcy court chooses.
Ironically, the highest rent may not be the landlord’s greatest concern. Some appreciate no-cost or low-cost fringe benefits. For example, some tenants pick up their landlords and drive them out for a summer tour, pointing out any work they did to fill in ditches or keep weeds under control. Then there’s the tenant who mowed the landlord’s yard when her husband fell ill and had to be hospitalized. Another tenant brings the landlord some locker beef every Christmas. In each case, the landlord feels a stronger connection and loyalty to those tenants than the ones who just pay cash rent.
Stout: With the present economic climate, you should be careful about offering higher cash rent without regard to profitability. Unless prices change a lot between now and Sept. 1, I wouldn’t expect cash rents to go higher for next year, unless you have been paying under the going rent on these farms. Work on a cash flow budget, based on prices and costs that you know, to see if the rent is reasonable. Something you might want to discuss with the landowners would be a flexible cash lease, which would give them a base cash rent with the possibility of a bonus based on higher yields or prices above a predetermined level.
Best solution for hauling grain
My farming partner and I parted ways this past winter. He owned the semis and hauled the grain. I need to either buy a couple of semis or contract with someone to haul my grain. I typically haul to an ethanol plant 15 miles away, but sometimes the price is better 50 miles out. Should I buy new or used trucks, or line up a custom hauler?
Plastina: The right answer really depends on the scale of your operation and how much working capital you can sacrifice to make the loan payments over the life of the loan (plus property taxes and repairs). For example, suppose a used semi costs $70,000. You pay $10,000 down and borrow $60,000 at 4.5% interest, with 10 equal annual payments. Principal plus interest would be about $7,600 per year.
If the custom rate to haul grain to the ethanol plant is 15 cents per bushel (one-way trip), and yield is 180 bushels per acre, then hauling bills for a 300-acre operation will exceed the value of the annual loan payment. But can the farming operation use $10,000 of its working capital to make the down payment? For a 670-acre farm, hauling bills should add up to slightly more than the down payment plus the first loan payment.
Miller: There are lots of considerations you have to take into account before you buy a semi. Most important, do you have someone who will operate it for you? In our area, it is hard to find someone who is willing to spend the long hours needed for the harvest season. After harvest, you may be able to do the hauling yourself, which could save you some money. However, if your operation has livestock, as well as grain, you may need a hired driver for every load.
The second most important question is will it be cheaper to haul your own grain compared to custom hauling? The cost of payments on the truck and trailer, labor, fuel, licensing, insurance, repairs and maintenance must all be factored in. It can easily take 150,000 bushels per truck and trailer to bring those costs down to less than the cost of a custom hauler.
It is convenient to have a truck ready when you are. Also, if you have been using the semis to move grain out of the field, then you may have to consider the cost of replacement wagons as part of the decision process. Take concerns into account when calculating the total impact on your operation.
Stout: The answer depends on a lot of variables. In my area, trucking charges are about 10 cents per bushel for 15 miles and 20 cents per bushel for 50 miles, but you should check with local haulers to get prices for your location. Typically, to pay for a semitrailer you would need to keep it on the road regularly. Unless you have a lot of your own grain, you would probably need to haul other peoples’ grain, also. Do a cost comparison between your local costs to haul grain and the cost of owning and operating the semi (fixed and variable). If it favors ownership, determine whether you have the time or have hired labor available before you make that decision.