Calculate Cash Rent

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Most people agree that cash rent should be about 30-38 percent of the gross production value of the land, but many rental agreements fall well below that range. While cash rent rate calculations aren’t an exact science, there are several methods you can use to generate a ballpark estimate of what might be a fair cash rent value for your tillable land.

As Greg Bussler, State Statistician for Wisconsin at the NASS told us, “There’s a lot of variety in terms of how the landlord or the farmer decides what the going rate is. Many things enter into that decision, including what the land’s going to be used for.” The list of considerations includes whether you plan to raise crops and how long the land arrangement is set to last impacts the cash rental rate.

It’s important that you establish a fair and reasonable rental rate on your cash rental lease that makes sense for both you and your farmer, and there are a few ways you can arrive at your price per acre. With an eye on Midwestern states and farmers who are planting row crops, here’s a guide to cash rent calculation methods to help you arrive at a fair rate.

The role of data in calculating cash rent

In order to determine how much your farmland is worth per acre, you’ll need to have data on hand. There are three main sources of data that can be used to help determine if your rental agreement is in an acceptable range:

 

  1. Your farmer. If you don’t already have terms in your farm lease requiring data collection and delivery, be sure to add them going forward. As a steward of the land you own and your partner in maintaining the health of your soil, your farmer should have no problem sharing their yield data, input receipts and any soil test data they collect.
  2. The USDA. The USDA’s website posts what can feel like an overwhelming amount of data, but there are two numbers that you can use to measure your tillable land’s health and production against the averages in your county: cash rents and yields.
  3. The futures market. Farm rental prices are set by looking at the land’s potential for the season ahead. While past yields hold some clues, to establish a price of corn for the year ahead, you’ll have to look to the futures market, which can provide you with a banker’s best guess at prices for commodities in the year ahead. For example, the CME Group provides a good site to research corn futures.

 

Whatever data sources you choose, it’s a good idea to maintain detailed records of your cash rent and yield history. These numbers help support the value of your land over time, and may help you demonstrate the value of your land in the event that you change tenants.

Six common ways to calculate cash rent

Before we dig into the ways to calculate cash rent, it’s worth mentioning that there are a couple of types of cash rent out there.

You may rent your farm at a fixed price per acre for the entire farm, including outbuildings, pasture, waste and other features of the property. The alternative is to rent your farm with a fixed price per acre for the tillable acres and set a different rental rate for any outbuildings or pastures included in the farm lease.

Whole farm rates tend to be lower than cropland rental rates because the land that’s not being planted is not productive in the same terms.

For the purposes of this exercise, let’s say we’re talking about cropland rental rates and that we don’t yet know if it will be a good year for corn prices or yields. Our goal is to calculate cash rent with the information available at the moment using the data we can gather from the prior year.

If reaching out to an independent contractor is unappealing, Tillable offers a
Free Farmland Checkup to help you get a sense of the comparative productivity of your farmland and what competitive pricing looks like within your county.

1: Gross income or gross crop revenue approach

Price of corn x Yield x 30-38%

This is the most basic formula for calculating cash rent. With clean data, the gross income approach is both accurate and tough to dispute.

But it’s impossible to know what the price of corn will be in the fall when you’re setting your rates at the beginning of the year.

2: Return on investment approach

Value of land / acre x ROI (2.5-4%)

The return on investment (ROI) approach multiplies the current estimated market value of the cropland by the expected rate of return. To determine what rate of return you can expect, look to county averages over the past decade.

It’s worth noting that this method may be particularly imprecise during periods when land values are rapidly fluctuating.

3: Producer income approach

(Price of corn x Yield) – Producer costs

In a world of perfect communication and seamless expense tracking, the producer income approach would be a marvelously fair and accurate approach to setting cash rent rates.

Because this method of calculating cash rent relies entirely on farmers to provide the data that goes into this calculation, this math does not provide an equitable basis for setting the rent. For these reasons, we’ll set this approach to the side.

4: Productivity index approach for Illinoisans

(Farm PI / County average PI) x County average yield
x Price of corn x 30-38%

This method relies on the Illinois state productivity index (PI), but that doesn’t mean this shouldn’t be of interest for those in other states as there are similar measures out there. (We’ll get to Iowa in a minute.)

This method aims to adjust the rental math based on the relative quality of your farmland. In creating the productivity index, Illinois recognizes that the USDA data is based on averages and that farmland quality can vary widely within a given county. This is one state’s attempt to get more specific.

To get a sense of the impact this index has on cash rents, we spoke with
Dr. Gary Schnitkey, a professor at the University of Illinois who specializes in farm business and farm management data. When asked about how cash rent is calculated in Illinois, he said, “We find pretty good linkage between PI and yields over time, as well as the ties between productivity and rents.”

5: The CSR or CSR2 approach for Iowans

Average CSR2 for the land being rented x Rental
rate per CSR2 point

In Iowa, cropland cash rental rate can be computed by multiplying the average CSR2 by a rental rate per CSR2 point. To get a sense of current and historical rates, check out the ISU Extension’s most recent publication of cash rental rates for Iowa, which shows typical rental rates per CSR2 index point by county.

Why do they do it this way? Iowa runs on corn and their state agriculture depends on it. Their
databases for corn suitability and soil interpretations are robust, and this data plays a key role in how Iowans set cropland rental rates.

The CSR index was initially developed for property tax assessment of farmland, and they chose to base it off of productivity. Like PI in Illinois, this is an imperfect but helpful measure for establishing a baseline measure for the health of the soil.

Today Iowans set their cash rental rates by the quality of the soil to help stabilize cash rent prices statewide. Because there’s an abundance of opportunity in Iowa, this method helps farmers get a fair deal and aims to prevent locals from getting priced out of the market.

If you’re wondering how to compute the Iowa Corn Suitability Rating for your farm, we recommend the definitive guide on Iowa State University’s website.

6: The coffee shop approach

Simply put, this approach is to talk to as many people as possible in your area to find out what a fair rental rate might be. There are many reasons you might take this approach—perhaps you’re new to farming or maybe you recently purchased your tillable land—but the reasons not to do this are more compelling.

Iowa extension economist Alejandro Plastina and economist William Edwards do a beautiful job outlining the trouble with the coffee shop approach to setting cash rental rates:

“This method assumes that what others are charging is fair and equitable. A landowner receiving less rent per acre than the neighbors feels that they are not receiving what is rightfully due. However, a landowner receiving more than a neighbor may feel that they are being unfair to the tenant.”

Additionally, this approach is not grounded in verifiable data. What people say their rate is may differ from the typical rates, and this does not account for differences in the quality of the land for rent.

Rather than charging what other people say they charge, consider the data you have on hand and what data you need to collect to have a more concrete understanding of the health and potential of your farmland.

A Kane County, IL case study in cash rent calculation

Curious to see how these formulas work in practice? Let’s use a real parcel of tillable land and some real data to dig in.

For the purposes of this exercise, let’s say we’re talking about cropland rental rates, that it’s February, and we’re using the previous year’s yield data. We don’t know if this year will be a good year for yields or corn prices, and we have to make the best use of the information we have available to calculate cash rent for the upcoming year.

Where to collect data on your farmland and your county

We’ll use a farm in Kane County, Illinois as an example. Their harvest last year was 267 bu / acre and they harvested 189.4 acres.

You can get this information from yield maps that precision ag tools produce, or you can get the yield data from scale tickets. For continuity over time, it’s best to have both on record: past yields are the best indicator we have of future yields, but they’re not the only source of predictive data you can access. 

The next place we want to go for data is the USDA. For those who don’t have a trove of their own historical data, this is where you’ll likely have to start. Although USDA gathers tons of data, it’s only available to the public in the form of averages. 

Averages are great for telling us that farmland in one county rents for more than farmland in another county, but these figures don’t help much when it comes to discerning what fair market rent should be for a specific farm, except as a reference point.

There are two places where you’ll need to get data on the USDA Quick Stats website.

1. Once at Quick Stats, follow this path to locate the average rent in Kane County:

Survey > Economics > Expenses > Rent > Rent, Cash, Cropland, Non-irrigated – Expense measured in $ / acre > County > Illinois
2. To find the average rent in Kane County and as well as county average yields for the last 4 years, select:

Survey > Crops > Field Crops > Corn > Yield >Corn, Grain – Yield Measured in Bu / acre > County > Illinois
Note: Hold down the CTRL or Command key to select multiple years if you are looking for estimates from the past four years.

Between your yield records and the USDA website, here are the data points we’ve collected so far:

 

The relative quality of your farm

The next piece of data you should gather is on the relative quality of your farm. Because this example is taken from Illinois, we’ll need to look at the farm’s PI.

One place to do this is at a site called Acre Value, which offers this information for a low monthly subscription price (currently $9 / month). As you should only have to do this once, you don’t need to maintain a monthly subscription.

Below is a screenshot of our sample farm in Kane County:

This particular farm has a PI of 133.1, which is pretty good. This number puts it just over the line as Class A farmland.

The Future Price of Corn

For this example, we’ll use the CME Group’s website, which we referenced earlier, to look up a prediction of the future price of corn.

Let’s say the actual corn future price in February of this year for the following December is $3.58 / bu. In other words, that was the bankers’ best guess at what the price would be in December.

Putting Cash Rent Formulas to Work:

5 Questions and Answers

1: How much was this field worth last year?

Let’s use the gross income approach to get started:

Based on the most basic gross income formula, we find that the land’s approximate worth was $314.92 / acre last year.

2: How much better is the field than the county average?

By comparing our estimate to the USDA’s data on the average rental price per acre in Kane County, we can see that this rent would be 29 percent higher than the average rent in this county.

3: How much better is this field than the county average?

By comparing the farm’s average PI and the county average PI, we see that the farm’s soil quality is only 7 percent better than average.

4: How much better were last year’s yields than the county average?

Last year, the yields on this farm were 51 percent better than the county average.

5: What can we take away from this?

This person is a good farmer. His yields were 51 percent better than the county average and his field was only 7 percent better, according to the PI adjustment calculation.

Based on actual yields and actual prices from last year, fair market rent was about $315.00 / acre, which was 29 percent higher than the county average.

The next step is to plug in some of the information we gathered into three of the formulas we outlined in the first section of this guide to calculate cash rent:

Option 1: Gross Income Approach
Option 2: PI Approach
Option 3: ROI Approach

So, what should the cash rent rate be on this farmland?

Before we answer this question, we have one last calculation method to share before we give you our best estimate of what the cash rent should be on the farm in our example.

Our number comes from data that we ran through the Tillable platform. This takes into consideration the gross income approach, which establishes $237 / acre as a baseline for the bottom of the range for this field.

From there, the algorithm takes into account that the PI approach adjusts for the relative quality of the field. Additionally, the ROI approach provides a gut check. This typically represents the top of the range or what we can expect from an elite farmer.

Using the Tillable algorithm and the previous year’s USDA county average, the cash rent for this field comes out to roughly $315.00 / acre. That number also happens to be the fair rent for last year based on the real numbers.

To see how these formulas stack up, let’s look at them together:

The previous year turned out to be a great year for yields in Kane and a bad year for corn prices.

The futures market in our example says that corn prices will be slightly better in the year ahead, so with that data we feel that around $315 / acre would be a fair cash rent for this farm and this farmer.

How often should you review your rental rate?

We encourage landowners to review the data they collect with their farmers every year, but this may or may not translate to annual rent adjustment.

For example, if you have a multi-year lease, your rate is already locked in. It’s still a good idea to review your data and performance on an annual basis: holding regular conversations about performance and expectations can help ensure there are no surprises when it’s time to renew the lease.

If you do have a one-year lease, there are many factors that could influence whether you want to change the rental price. You may want to consider any improvements that need to be made in a given year or you may want to take your gut instincts into account. If you’re comfortable with the rent you’re receiving and you have a great relationship with your farmer, there may be no reason to make an adjustment, even if there has been some fluctuation in the data.

The rental price per acre is one component of your relationship with your farmland tenant. The right price per acre in the upcoming year may be more reflective of what you and your farmer need than local market indicators. At the end of the day, your long-term relationships should be positive and mutually productive. Data is just another tool to help you arrive at a rental agreement that you and your farmer agree is fair.

Whatever the conversation this year or next, once you’ve determined what a fair rental price looks like for your land using any of the methods we’ve discussed, you’ll have a stronger baseline for future discussions.

Fair market rent means that sometimes the rent will come down

Anytime you calculate (or review) your farmland’s rental rate, the goal is to arrive at a number that’s fair to everyone involved. This may mean that the rent stays the same, increases, or goes down, and landowners must be open to all three possibilities.

While rent decreases are not typical, this does happen. If a farmer has been overpaying and data illustrates that the fairest price is lower, then rent should go down accordingly. There are, of course, other reasons this can happen. The rent might go down because a known flooding issue proves itself to be worse than anticipated or because an infrastructure issue remains unresolved.

You never know how a season will unroll until it does, and land doesn’t always produce the way you think it will. With the help of data, farmers and landowners are better-positioned to have these conversations.

The role of data and price discovery in calculating cash rent

The formulas we discussed for calculating cash rent can help you find a ballpark rate, but they won’t tell you what the market is willing to pay to rent your tillable land. Even if you choose to undergo a price discovery process on the Tillable platform, the only real price is the one someone agrees to pay.

It’s also important to remember that any rate may change in the negotiation process. For example, if you’re looking to work with a farmer who you’ve known for years and enter into a longer term lease, the rate may go down. And you may never know how much your neighbors pay to rent a comparable piece of land. This process is founded on uncertainty and all formulas are an attempt at arriving at a best guess.

When we spoke with Dr. Schnitkey, he lamented that talking about cash rents is almost always a difficult subject and that there is no publicly available source that shares farmland rental rates. “Actual rents are difficult to come by. There’s no public source for discovery of what rents actually are.” To a certain extent, everyone is engaging in guesswork.

This lack of aggregated information is part of why we built Tillable. Our algorithm allows us to use hard data collected over time to compile a better record of farmland values. Using Tillable, farmland owners can aggregate data from past yields, soil tests and rental payments.

While it’s impossible to outline a “best” way to set cash rental rates, with your farmland’s data on hand, you’ll be better positioned to demonstrate the value of your land for years into the future.

Are you doing everything possible to keep your land fit for the future?

Find out with our free, no-obligation Farmland Checkup which includes soil maps, productivity score and rent evaluation.

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