Indiana Correspondent

COVINGTON, Ind. — Ever since corn prices hit $4 per bushel, landowners have bombarded University of Illinois extension educator Ruth Hambleton with one big question: “How much can I raise my cash rent?”

But the answer is more complex than some may realize. “There is no one-size-fits-all, and there’s no golden number out there,” Hambleton said during an Oct. 11 farmland lease seminar sponsored by the UoI and Purdue University Bi-State Ag Group. Landowners from Indiana and Illinois attended the seminar to learn how to formulate a fair farmland lease in a volatile market where the demand for corn and soybeans, rather than commodity programs, is the driver, and the value of farmland is increasing rapidly.

“The dynamics have changed a lot the past 15 months,” said Bob Swires, a farm manager from Danville, Ill., who attended the seminar. “I was kind of curious to see what the extension folks have to say about leases, because I get a lot of calls from (landowners) who wonder what they should be charging. It’s always an awkward negotiation.”

Hambleton suggested a fair cash-rent agreement should range from 25-40 percent of gross revenue, depending on the quality of the land. For low productivity land, the rate would be 25-33 percent; for moderate productivity land, 33-35 percent; and for high productivity land, 35-40 percent.

Gross revenue equals yield multiplied by price, plus government payments. In order to calculate a reasonable base-rent level, Hambleton stressed it’s important to use yield and price estimates that can be considered longtime averages.

“What we’re trying to do is pick something in the middle,” she said. “There will be times when the farmer makes a little more money, and there will be times when the landowner makes a little more money. But finding that middle point is crucial.”

Hambleton said it’s also possible to “add a little twist” to the cash-rent contract by including a bonus clause that entitles landowners to receive a bigger slice of the pie in years when gross revenue is higher than predicted. However, the bonus clause can’t be tied to the production, since the lease will then be considered a crop-share agreement.

Once a landowner and a farm operator agree on the terms of a contract, Hambleton strongly recommended they put it in writing. Currently, only 27 percent of all crop-share agreements and 60 percent of all cash leases in Illinois are written down.

“If you have land in your portfolio, that’s a huge asset. The least you can do in a business sense is to put it in a written contract with the farm operator,” Hambleton said, pointing out that landowners are in a much better position to push for contracts than farm operators.

Tom Ayres of Danville, Ind., attended the seminar to learn the basics of calculating a lease that’s “equitable for both parties.” After inheriting 410 acres of farmland in Parke County, Ind., he’s tackling the task of negotiating a cash-rent agreement for the first time. “Getting detailed information from the farm operator so I can do the calculations is the biggest challenge,” he said. “I don’t know what the yields or the government payments are, and I don’t know how to get that information.”