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How does Price Discovery Work?

It’s estimated that US Farmland is under rented by $8 billion dollars a year meaning that many people are not receiving fair market rent.

For many people maximizing the rent is not their first priority, they are more than willing to sacrifice revenue in return for having somebody that they trust on their land. Regardless of your approach, Tillable’s goal is to supply landowners with information that enables them to make informed decisions. With Tillable you are always in control and your decisions are just that – your decisions – but Tillable gives you information and options.

In other posts we explored different approaches to determining fair market rent for your farmland. We explored different methods for calculating cash rent and one way to structure a flex lease. However, neither one of those approaches really solves the problem of understanding what the fair market rent is for your farm, which is one reason why we created Tillable.

Price Discovery

The price discovery process is the process of determining the price of an asset in a marketplace through the interactions of buyers and sellers. This is how most of the free world operates and is a cornerstone of free market economics. Today no price discovery, or very limited price discovery (i.e.: asking people at the coffee shop how much they’d pay is technically a form of price discovery) exists for renting farmland.

To achieve price discovery you must have a marketplace and that is one of the primary functions of Tillable. When it comes to pricing farmland we believe in farmers over formulas. Tillable is an online platform that allows you to list your farmland and receive offers from farmers helping you determine the fair market rent for your farm through the interaction between buyers (or farmers) and sellers (you).

One of the most common questions we receive after we explain how we deliver price discovery is, “do I have to switch my farmer?” The answer is no. You are always in control. However, by going through the price discovery process you will see what other farmers are willing to offer, which will make it easier to negotiate with your current farmer and give you options should those negotiations fail.  If switching your farmer is not an option for you, you should at least understand the extent of the discount you are likely giving  your current farmer.

The second question we often receive is, “do I have to go through the price discovery process every year?” Again, the answer is no. Once you establish a fair market rent you don’t need to go through the process again unless you are unhappy with your farmer. Every year Tillable provides landowners with a scorecard to let you know how your rent, yields, and soil management practices, among other things, compare to similar farms and fields. So if you own class A farmland in a certain geography, you will receive comparisons to similar class A farmland providing you with much needed context to understand your farm’s performance and either provide you with confidence that your farmer is doing a good job, or provide you with an indication that you should consider finding a new farmer.

We understand the relationship between landowners and their farmer can be deeply personal, but your farmland is an investment and you deserve to be fairly compensated.

Listing Your Land

As a landowner you list your land on Tillable and supply all interested farmers with any information that you have on the farm. It’s ok if you don’t have complete information, once you identify your field we can help gather other relevant information from public sources to ensure farmers have all the data they need to make an offer.

Below is a sample of what a listing looks like.

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Once your land is listed interested farmers will make offers based on your listing criteria. If you have special criteria, like organic farming only, no till, or even a requirement for an apple pie once a year – put those in the listing. Once you choose a farmer those additional criteria will also become a part of your lease.

Choosing a Farmer

Most people are surprised by the number of offers they receive and the quality of the farmers they attract. On average farms listed on Tillable receive 18 offers.

Each offer comes with additional information about that farmer including how long they have been farming, distance from their operation to your farm, total number of acres they currently farm, and the farming practices and philosophy that they employ.

Tillable summarizes the data from all of the offers so that you can select for the criteria that are important to you, as well as see how different skills correlate with the offer made by each farmer.

For example the graphic below is a histogram of cash rent/acre offers made on a farm listed for the 2018 growing season.

Screen Shot 2018-05-10 at 9.25.15 AMThere is a host of offers to choose from. From looking at this chart we can determine that the top of the market for this farm is $315-330/acre. We can also see that taking anything below $270/acre would be accepting too little.

 

The next step is to look at the farmers that best meet our criteria. For example we could also look at their farming experience compared to their offer.

Screen Shot 2018-05-10 at 9.25.55 AM

This chart reinforces that some of the most experienced farmers are also making high offers. If experience is important to you, you might sort on experience instead of price, or maybe find the best combination of both.

Tillable will also provide you information on how many acres they are currently farming.

Screen Shot 2018-05-10 at 9.25.30 AM

This data is important because most farmers struggle to grow their operation by more than 20% a year. If adding your farm means surpassing that 20% growth threshold for a farmer make sure you are comfortable with their plan to expand and their ability to manage that growth.

In addition to pure data Tillable will provide you with a detailed profile on each farmer  including any additional information a prospective farmer wants to share about their philosophy and approach to farming.

At the end of the day Tillable supplies you with information and you make a decision. True price discovery requires receiving multiple offers (more than what you will find in the coffee shop) and even if you are set on renting your farm to a family friend, it is still useful to understand just how big a discount you are giving them.

Conclusion

The only real price is what somebody is willing to pay for something. Tillable helps you understand what farmers are willing to pay to rent your farm.

When Americans sell just about anything of value – a car, a house, a boat, a computer, etc. we seek multiple offers for that item. If we are selling it to a friend at a discount, most people still look at market prices to determine just how big a discount they are willing to give to their friend.

Farmland is different. It is an asset that needs to be taken care of and protected for the future, but a good farmer can both take care of your land and pay you what you deserve – taking care of your land is important, but it also isn’t an excuse not pay you what your land is worth.

Tillable’s marketplace offers true price discovery so landowners can understand what their farm is really worth. In addition, Tillable’s data collection ensures that landowners are earning what is fair and keeping a record of their farms production capability building value for the future. You can read more about how we collect data for landowners here, but in the meantime please consider signing up for Tillable and finding out how much your farm is really worth. Signing up is free and you only pay Tillable in the first year if we help you increase your rent.

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