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Questions about rental agreementsBy Randy Buhler CSU Extension, agronomy, Logan County Colorado With the nation's attention to the national election over, it is time for everyone to get back to work. Farmers stymied waiting for wet corn to dry have time to contemplate how next year economic conditions will affect their farm operation. I have received more than a usual number of calls about share rental agreements, cash rents, and terminating rental agreements. This year's high grain prices led to inflated expectations on both tenant and landlord points of view. Higher input costs put farm operations at greater risk of loss than ever before. Deflation of historically high grain prices by hedge fund and speculator investors leaving the market in droves removed the futures market offset for those input costs. Price uncertainty will cause complication with setting rental agreements for next year. Two agriculture economists from the University of Illinois have offered some help for those in this situation. For a fixed cash rent situation, they recommend delaying setting that rental rate until March of 2009. By that time, the base prices used for revenue crop insurance policies will be set. If the rate setting cannot be delayed, then use lower rates than last winter and spring grain prices would have justified. They recommend a variable rent arrangement as the fairest way to split yields, prices, and input costs. For a variable rate rent agreement, they recommend creating a base rate first. The base rate could correspond to the insurance base prices and either the average county yield or the average farm yield. The variable rate rent is calculated according to the following formula. Cash rent equals the base rent times the ratio of actual yield times actual price divided by base yield times base price. As an example, say the base rent is $180 based on a 180 bushel corn yield and $4.20 per bushel price. Actual harvest is 200 bushel and you hit the elevator on a good day and get $5 price. Calculating with the formula gives a cash rent price of $238. As another example, with the same base rent, the actual harvest is 150 bushel and the elevator price is $3.20. Your actual rent would be $114.29. You must set the base yield and base price as your starting point. Under current economic conditions, the risk-return level can maintain a landlord rent but increase the risk a farmer assumes. Alternately, if a rate is set to maintain risk for the operator, rental rates could decline for the landlord. You need to discuss this business situation between each party and develop a workable rental rate. This article is based on a farmdoc publication titled "2009 Rental Decisions Given Volatile Commodity Prices and Higher Input Costs" by Gary Schnitkey and Dale Lattz. This and other relevant publications can be accessed at http://www.farmdoc.uiuc.edu. 11/17/08 Date: 11/12/08 Advertisement
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