Can you afford to rent this ground?
December 10, 2015
I heard a statistic recently that around 40 percent of the farmland in South Dakota is not owned by farmers. So that means that nearly half of the acres farmed are rented from or shared with a landlord. As the combination of technology and profitability has both encouraged and allowed most operations to increase the number of acres operated in the past decade, a large amount of this growth came by adding rented ground. During the past few years, this practice was very effective and any risk taken was likely rewarded. However, with today's current economic conditions, I am not sure that this is still the case.
It is easy to see that with the current prices, the higher priced cash rents have a very small likeliness of being profitable this year or next year. Throughout the fall, I have been encouraging producers to discuss this with their landlords. I encouraged producers to show them the actual 2015 income and expense and projections for 2016 on the rented ground. As I like to advocate creating trust through transparency, I also encourage sharing numbers from the previous few years as well, when things were more profitable as well.
I have actually heard some of these conversations going well, with the landlord agreeing to make a small reduction to the price, or at least agreeing not to increase it for 2016. I have heard other reports that regardless of what the numbers say, their landlords do not plan to lower the price, which is certainly their choice. But as the farmer, unless you are tied by a contract, in most cases you do have a choice. You can look at the facts and determine if there is any possibility to be profitable on this ground in the upcoming year or years. I realize this is easier said than done, but if you know that you will not make any money farming this ground and also know that the landlord will not lower the rent in the future, you need to strongly consider letting it go.
I fully understand that this will be a significant change in mindset as everyone's goal has been to grow the past few years. There were certain efficiencies gained as you grew to maximize your equipment, labor, storage, etc; so you will need to consider making adjustments to your fixed expenses if you plan to cover fewer acres. The key will continue to be maximizing efficiency as we know the next few years will remain lean. To do this, you absolutely need to know your numbers. You need to know your variable costs per acre such as seed, chemical, fertilizer, land rent, crop insurance, fuel, custom application, marketing, trucking, depreciation, repairs, operating interest, and labor. Then you have overhead costs such as farm insurance, utilities, professional fees, management expenses, real estate taxes, term loan interest, employee benefits, machinery and building depreciation, and others. Don't forget, you also have family living expenses as well. As a point of reference, our data showed the average family living expense in 2014 was $84,719, or $56.47 per acre if you farm 1,500 acres.
So as you are negotiating rent or trying to decide if you can afford to farm a particular piece of ground next year, make sure that you think about these things. If you would like help learning how to track these numbers on your operation, contact the South Dakota Center for Farm/Ranch Management at Mitchell Technical Institute at 995-7196 or firstname.lastname@example.org.