U.S. farmland is under-rented by an estimated $8 billion per year. It’s estimated that in 2017 in Illinois alone, landowners left ~$1.2 billion on the table. This is not about jacking up the price on farmers—most people will agree that cash rent should be between 30-38% of the gross production value of the land—but at least 50% of landowners (likely more) are well below that range.
Below we will outline some of the most common methods for calculating cash rent as well as where to find information to plug into those formulas. These calculations should get you in the ballpark, but as with any other asset, the only way to find out what farmland is really worth is to understand what the market is willing to pay for it. That’s where price discovery comes in, which we’ve covered in a separate post.
The most common approaches to calculating cash rent
Below are the 5 most common ways to calculate cash rent. We will walk through the process of calculating cash rent using a couple of these methodologies. For the purpose of this exercise, let’s pretend it is February 2018. We don’t know if it will be a good year for yields or corn prices, and we have to make the best use of the info we have available to calculate cash rent for the upcoming year. Option number 1 is the most basic formula, and arguably the best with perfect data. The problem is getting the right information. If you are setting the rent in late February, how do you know what yields will be and what the price of corn will be in the fall? There are a couple of techniques that can help you make an educated guess, which we review below.
Option number 2 can be useful if you just bought the farmland, or if you happen to have very good information on the approximate value of your farmland. However, even if you have great information on how much your land is worth, we suggest only using this as a reference point.
Option number 3 might be the fairest and the most accurate in a perfect world, but unfortunately it is overly dependent on your farmer for information. Because of that, we are going to put this approach to the side.
Option number 4 adds a new component. It attempts to adjust the rental calculation based on the relative quality of your land. The PI (Illinois only) adjustment calculation recognizes that USDA data, which is often the only information available to many people, is based on averages and takes that fact into consideration to adjust the rent up or down based on the relative quality of your land.
Option number 5 is probably the most common approach and the most flawed. Not all farmland was created equal, and relying on what other people are getting for their land without knowing how it compares to your own land is not a good approach by itself.
Data, data, data
Like any calculation, the formula is only as good as the data you plug into the formula. That’s why if at all possible you should be collecting real data from your farmer.
In the last 10 years, precision agriculture tools have come a long way. There is a good chance that your farmer is already using one; in fact, we strongly recommend only working with a farmer leveraging one of these tools. In our first year, more than 70% of the farmers making offers on a farm listed on Tillable already used one—such as Climate FieldView, My John Deere, Ag Leader, etc.
To give you an idea of just how powerful these tools are, below is a sample of data from a farmer using Climate FieldView. We will use this farm and farmer as the sample for our calculations moving forward. We have obscured information to protect the innocent, but the important bits are still visible. From this image we can see that in 2017 this farmer had an average yield of 267 bu/acre for this field. We can also see that he harvested 189.4 acres. In addition to info from a precision agriculture tool, you should also be receiving scale tickets. The tools can have calibration issues, or malfunction, so it’s best to get both.
This data is from 2017 and for the purposes of our exercise, we don’t yet know if 2018 will be better, or worse, but it is helpful to have data from the last couple of years. In the absence of a crystal ball, past yields are the best indicator we have of future yields, so you should always have a record of how your field is performing. For now, put this information to the side and we will go gather some more.
The next place we want to go for data is the USDA. For those that don’t have real data, this is likely where you will have to start. Although USDA gathers a ton of data, it is unfortunately only available 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 they don’t help much when it comes to telling us what fair market rent is for a specific farm. However, it’s still a useful reference point. Go to https://quickstats.nass.usda.gov to find the averages for your county. The county for our sample farm is Kane County, Illinois. So using this tool, we get the information for the average rent in Kane County, as well as county average yields for the last 4 years (see below). The next piece of data you should gather is on the relative quality of your farm. In Illinois this is indicated by something called the Productivity Index (PI). In Iowa they use CSR2, but in most of the “I” states, there is a way to find out how your farm’s soils compare to others. One place to do this is at a site called Acre Value. They offer a free one-week trial, and you should only have to do this once. Find your farm and make a note of the farm’s PI (or whatever ranking mechanism your state uses). Below is a screenshot of our sample farm in Kane County. This particular farm has a PI of 133.1, which is pretty good and puts it just over the line as class A farmland.
The last piece of the puzzle is price. How do you predict the price of corn in December of 2018 when it is February of 2018? The futures market, of course. Now, nobody can predict the future, but this is the best tool available to us. A good site for this is the CME Group. Corn futures can be found here: http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn.html.
The actual corn future price in February of 2018 for December of 2018 was $3.58/bu. In February of 2018, that was the bankers’ best guess at what the price would be in December.
So here’s the data we have gathered so far:
Sample Field: 205 Acres, 189.4 Tillable Acres, Kane Co., IL
- 2017 Actual Yields: 267 bu/acre
- 2017 USDA County Average Yield: 176.4 bu/acre
- USDA 4-Year County Average Yields: 189.2 bu/acre
- USDA County Average Rent: $244
- Field PI vs. County Average: 133.1/124.3
- Price of Corn: $3.58 bu (actual futures price the last week of February)
Let’s do some basic calculations to provide us with a couple of reference points: How much was this field worth in 2017?
- 267 bu X $3.37 (Dec ’17 corn price) X 35% = $314.92/acre
- 29% higher than the 2017 county average rent
How much better is the field than the county average?
- 133.1/124.3 = 1.07 = 7% better than the county average
How much better were the 2017 yields than the county average?
- 267/176.4 = 1.51 = 51% better yields than the county average
A couple of observations: This person is a good farmer. His yields were 51% better than the county average and his field was only 7% better, according to the PI adjustment calculation. Based on actual yields and actual prices in 2017, the fair market rent was ~$315/acre, which was 29% higher than the county average. The next step is to plug in some of the information that we gathered into the formulas we outlined above to calculate cash rent:
Option 1: Rent = price of corn X 4-yr. co avg yield X 30-38% $3.58 x 189.2 x 35%=$237.07
Option 2: Rent = (Field PI/Co Avg PI) X price of corn X 4 yr. Co yield X 30-38% 1.07 X 189.2 X $3.58 X 35% = $253.66
Option 3: Rent = value of land/acre X ROI $8,125 X 4% = $324/acre
The first option doesn’t take the relative quality of the field into account, but it does tell us that based on 4-year county average yields, the county average rent should be ~$250/acre.
The second option adjusts for the relative quality of the field, and I’d make this the baseline rent for this field. Why make it the baseline? Because it tells us what we should expect an average farmer to achieve on this field given the pricing assumptions.
The last option is a gut check—a reference point. This data comes from Acre Value and should be taken with a grain of salt. No farm in Kane County sold for less than $9,000/acre last year, which tells us that the valuation offered by Acre Value is probably low and the cap rate we are using is probably high. Again, this calculation is really only useful if you have just purchased the farm.
One thing we learn from this exercise is that farmers grow commodities, but good farmers are not commodities. After adjusting for the relative quality of the field, our sample farmer is producing yields 44% higher than the average farm in Kane County. That means that he is able to pay the landowner significantly more than an average farmer, while still keeping more for himself.
So what should cash rent be? We have one last calculation to share with you before we give you that answer. The following calculations are derived from data that we ran through the Tillable platform last year. If $237/acre is the bottom of the range for this field, then the following formulas will give us a better idea of the top of the range and what we should expect from an elite farmer. Using this formula and the 2017 USDA Co average, the cash rent for this field comes out to ~$315/acre. That number also happens to be the fair rent for 2017 based on the real numbers. 2017 turned out to be a great year for yields in Kane, but a bad year for corn prices. The futures market says that corn prices will be slightly better this year, so with that data we feel that ~$315/acre is a fair cash rent for this farm in 2018 for this farmer.
The market really defines what’s fair
At the end of the day, calculating cash rent really is just a best guess; we ended up with a range from $237 to $315. We believe $315 is fair for this farmer, but if anything, this also tells us that having the right farmer is as important to our return as any other factor.
With the right data, you can make a more informed guess, but there is no silver bullet or magic formula. It is especially difficult for somebody who isn’t a farmer to guess what the land is capable of producing in any given year, not to mention what the price of corn will be in 9 months.
At Tillable, we remove this uncertainty from landowners by renting your land directly from you, then finding a qualified farmer to operate on that land. In the process, we also determine the fair market rent that farmer will pay, based on current, local market conditions. Once the fair market rental is set based on real market data, we keep landowners up to date on how their farm is performing by providing anonymous comparisons to other similar farms. This data helps landowners understand if the farmer is 1) taking care of the asset for the long term and 2) achieving competitive returns.
Calculating cash rent, as shown by these formula options, can be challenging. However, an easy way to get some baseline information on your farm is to let us do the homework for you by requesting a free Farmland Checkup. It’s a great starting point for understanding your farm’s potential, and a lot simpler than fighting with formulas. We’d love to help!
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