WHAT CAN YOU PAY
or CHARGE FOR LAND RENT?
Approximately three million of the 10.1 million acres of farmland in Georgia are rented. Most of this rental land is cropland and is a basic farm input. Without land, no commodities would be produced.
Owner Entitled to Return on Investment
But land is a capital item, and as such, is entitled to a return on investment. Consequently, landowners who rent land to farm operators expect a return on their investment based on the income earning potential of the land.
But how much return is reasonable? Agricultural statistics tell us the annual rate of return on farm assets over the past 30 years has been 9.6%, but, 6.1% of this return is due to capital gains. Thus, the return due to current farm income has been 3.5% annually over this time period. This is borne out by the rent-to-value ratio of land which approximates the rate of return from farm income. This value (rent-to-value ratio) in Georgia has ranged from 3.2-to-4.2 in recent years
Operator Has Limits on Rental Price
Those who operate this land are willing to pay for its use, but the amount that can be paid is limited by: 1) The production potential, 2) The expected commodity market price, 3) The weather and, 4) The managerial ability of the farm operator.
The result is a negotitiation between the land owner and land renter. It is necessary that the tenant make a profit if they are to continue in farming and remain a future tenant. In instances of cash rent (which is the most common rental arrangement) the tenant assumes all the production risk. While the landowner assumes no risk with this type agreement, it is reasonable to expect a return to the investment.
This worksheet is designed to help arrive at an equitable rental price.
NOW LET'S SEE WHAT RENTAL LAND IS REALLY WORTH!
I. First, estimate how much income an acre of the land will generate.
Be realistic! When estimating the yield, take into account the yield over several years, not just the year growing conditions were ideal.
And when projecting a commodity price, consider how you plan to market the crop -- Forward contract, Hedging, or Cash sale at harvest.
Some crops will have two sources of income. Cotton will have lint and seed, and you may bale the hay from a peanut crop.
Also, some crops will be entitled to Direct Payments, LDP Payments and Counter Cyclical Payments when applicable. Total all sources of income.
Finally, if you are renting pasture, have an estimate of the amount of forage that should be available. One acceptable method would be to have it in hay equivalents and value it as hay.
II. Next estimate the per acre CASH cost.
Don't include the value of unpaid family labor yet. But account for other items such as fertilizer, seed, fuel, machinery repairs and farm chemicals.
And again, be realistic. Make sure all cash cost items are included.
III. Now, subtract these cash costs (no. II) from the estimated receipts (no. I).
The difference is the amount you think will be left over to pay all other production costs, which are: 1)Unpaid labor, 2)Machinery and other farm overhead, 3)Rent, and 4) Your profit.
IV. Then, place a value on your unpaid labor and your farm overhead.
Unpaid labor =
$_________________ Per Acre
V. Finally, subtract these two items from your returns above cash costs.
THE DIFFERENCE IS WHAT'S LEFT TO PAY RENT PLUS YOUR PROFIT.
Compare the rental asking price with what you think is a fair profit for the risk you will incur when producing this crop. In effect, the rent (less any property taxes) is the profit to the landowner.
Now is the time to negotiate to
insure that both parties receive an equitable profit commensurate with their
labor, investment, and bearing of risk.
Click here... to view the Cash-Rent Agreement below in a new and seperate window for printing purposes.
Agricultural & Applied
The University of Georgia
or Crop-Share-Cash Lease Form, North Central Regional Publication No.
Dunaway, Robert and Darrell Dunteman. Ag Executive's Farm and Ranch Lease Guide Ag Executive, Inc., Bushnell, Illinois, 1995.
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