Thursday, August 26, 2010

It must be August...

Because it's time to recycle the old arguments about land rent.  Despite producer insistence that farmowners should have to bear some risk, flex (variable) cash rents are not popular.


But most farmers (I would guess) remain convinced landowners are somehow obligated to assume a portion of the downside. I have been trying to nail down where this business axiom originated and why it endures when few other businesses have any allocation of risk to the owner of an asset that is rented.

My conclusion is it is a hangover from the days when labor was THE input on farms.  As a result, the choice of tenant was crucial to success for a landowner.  Good tenants simply had more leverage because more depended on them.

Add in the presumed egalitarianism of a 50-50 lease. One for me, one for you.  Again this is based on the approximation that both contributed equally to the output.  This may have been true before modern agriculture but in the world of $7500 land and 20 minutes per acre of actual farming, it seems a little strained.

Regardless, I could be completely wrong and perhaps landowners should - by reasons of fairness or equality - be required to pick up some risk exposure. If true, then a huge opportunity exists.

Those who are not only willing, but eager to assume the entire risk should have an enormous advantage in the rental market.  Instead of querulous wheedling about some arcane rental contract that has yet to find a standard format, despite reams of farm economist opining about what flex rents should look like, the option of a check promptly delivered has no small allure, I would suggest.

Therefore, I have no problem with the farm media pounding this theme out, because it provides a stark comparison with straight cash renters. This does not rule out a strong business relationship with the landowner (in fact, that simply adds to the deliverables), and most good renters know this.  But compared to lecturing landowners on their social responsibilities, asking what number they have in mind is much crisper, at the very least.

So keeping this dream alive keeps some of the competition busy on trying to roll back the clock, while they wonder why BTO's roll on.


Anonymous said...

There is an industry where rents do flex. Outdoor vendors at fairs! Most pay a base rent plus a share of the profits. A most equitable arrangement due to the variability of profit because of weather, etc. Still I don't think most farmers want to divulge their profit info to landlords to save a few bucks. Case in point, I am about to offer an obscene cash rent for the farm next to mine this fall. Not because its what I want, but because its what will get the job done best I think.

Anonymous said...

I am amazed that there are not more comments on this "hot button" subject. I am retired and receive a percentage of the crop gross and am quite happy with the deal. And the tenants are too.

John Phipps said...


There is no such thing as "obscene" cash rent for land next to you.


John Phipps said...


That is the definition of a good rental agreement. Both parties are satisfied (or equally unsatisfied).

Anonymous said...

Hi John, Anon1 here. You're right. I should have put obscene in quotes just like you did. It may seem outrageous to most, but it makes sense to me.