Bruynis, C.L., Assistant Professor, Extension Educator & County Extension Director, Ohio State University Extension

ABSTRACT

There are a variety of land rental arrangements between landowners and tenants in Ohio. Discussions with farmers and landowners revealed that there has been a trend toward more cash rent leases and fewer crop share leases (Barry et al, 2002). Questions concerning the variability and long-term benefit between crop share arrangements and cash rents are frequent to Extension Educators in Ohio. Comparisons between cash rent, 50-50 crop share, and 1/3-2/3 crop share arrangement across Ohio were completed to determine if there was substantial difference in income variability as well as net income of the landowner. On average, from 2005 to 2011, crop share arrangement had substantially more income variation compared to cash rent although net income was slightly better for 50/50 and substantially better for 1/3-2/3 than cash rent.

Introduction

Crop producers in Ohio depend heavily on rented land in their farming operations, especially farmers engaged in raising corn, soybeans, and wheat.  Comparison of data from the 1997 and the 2007 Census of Agriculture revealed that rented farmland in Ohio increased from 42 percent to 56 percent, with some counties in northwestern Ohio exceeding 75 percent of farmland rented in 2007. In addition to an increased percent of farmland being rented, there has also been a shift towards more cash rental arrangements, including flexible cash rental arrangements  (Dhuyvetter et al, 1998). One of the more frequent questions received by Extension Educators from landowners concerns the best land rental arrangement for their farmland. This report examined the profitability and variance of income of landowners under the different common rental arrangements in Ohio.

Rental Arrangements

Determining the rental rate for farmland is a complex process since there is no well-defined market which sets land rental prices like the Chicago Board of Trade does in determining crop prices. To add to the complexity, differences in soil type, drainage, location, and a host of other factors affecting productivity, make it difficult to compare one farm to another in terms determining a rental rate. Additionally buildings and grain handling facilities on the rental property further complicate the rental arrangement price determination.

The historical method of renting farm ground in Ohio has been the crop share arrangement. The major crop share arrangement has been the 50-50 crop share arrangement where the landowner pays 50 percent of the crop production input costs such as seed, fertilizer, and chemicals and receives 50 percent of the crop at harvest. With this arrangement, the landowner historically pays for lime on the entire property and the harvest cost including drying, storage, and trucking for their half of the crop.  The land owner also receives 50 percent of the government payments. Another variation of this arrangement is a 1/3-2/3 crop share; however this is less common than the 50-50 arrangement. This arrangement did not require the land owner to pay any of the input costs and he received 1/3 of the crop at harvest. In recent years, there has been a steady decline of crop-share arrangements in Ohio and an increase in cash rental arrangements based on conversations with land-owners and tenants over time.

Cash rental arrangements are arrangements where the tenant receives a cash payment for the use of his or her property. There are several payment strategies ranging from receiving the entire payment upfront before the crop is planted, to everything being paid in the fall post-harvest, but typically there is a partial payment in the spring and a final payment in the fall for Ohio cash rental agreements.

There are several factors influencing the trend toward cash rent and away from crop-share leases in recent years. One of the factors favoring a cash rental arrangement was the adoption of no-till by the tenant and the perceived unfair redistribution of input costs to the tenant, in the form of higher herbicide costs (Dhuyvetter et al, 1998). Land transferring to the next generation of owners has been another factor that favored the trend toward more cash rental arrangements. Typically, the following generations are absentee land owners who were not able or willing to invest in crop production expenses or feel comfortable marketing grain. Also as the current owner’s age, they often traded the variability associated with crop-share arrangements for known fixed cash rents (Dhuyvetter et al, 1998). Tenants have also had reasons for wanting to switch to cash rental arrangements. Cash rental arrangement provide increased control of management decisions, reduce record keeping requirements for tracking input costs and crop production by landowner, and increased their flexibility for government program decisions (Barry et al, 2002).

Data Analysis

Studies conducted by The Ohio State University on land rent values in Ohio were the source for cash rental rates (Ward, 2011). This research has three rent levels associated with three yield ranges. The rent value correlating with the average Ohio crop yield (ODA, 2010) was selected.  Values used in calculating the costs associated with the crop share arrangements came from the annually published Ohio State University’s Enterprise Budgets for corn, soybeans, and wheat (Ward, 2012). USDA’s average crop prices for corn, soybeans, and wheat were used as the price received for crops sold. Even though there could be significant price variability received by the land owner, this price is a good representation of the average.  Average crop yields for Ohio, as reported by USDA’s National Agriculture Statistics Service were used in this research (USDA, 2013c). The data was compiled for the years 2005 through 2011 for this analysis.

In order to compare the different rental arrangements, the net income for the crop share landowner was calculated for each year included in this study. The gross income for corn, beans and wheat were calculated by taking the respective crop state average yield multiplied times the average US price (USDA, 2013b). Government payments and crop insurance proceed estimates retrieved from USDA were also added into the gross income figure (USDA, 2013a). Subtracted from the gross revenue were the variable production costs. Average production costs in Ohio were taken from the OSU Enterprise budgets, which included seed, fertilizer, lime, pesticides, crop insurance premiums, crop drying, hauling and a combining charge.

Profitability of corn, soybeans, and wheat varied annually.  Land owners with their tenant growing one crop annually could see significant differences in crop share rental value (see Table 1). Also there was different variability in land owner revenue depending on the crop share rental arrangement used. This report used an average distribution of crop acres planted in Ohio for the comparison between rental arrangements. The United States Department of Agriculture’s National Agricultural Statistics Service reported that 38 percent of the total acres planted were corn, 52 percent were soybeans and 10 percent were wheat in Ohio during 2005 through 2011. The income and expenses for each crop was weighed by these percentages to determine the landowner total net profit before taxes, land improvements, etc.

 

	Corn		Soybeans		Wheat
Year	50/50	1/3 crop	50/50	1/3 crop	50/50	1/3 crop
2011	$298	$328	$175	$192	$104	$141
2010	$266	$288	$178	$188	$113	$140
2009	$116	$213	$120	$164	$  62	$124
2008	$109	$190	$  86	$127	$136	$164
2007	$197	$217	$167	$165	$124	$133
2006	$124	$168	$  81	$108	$  94	$114
2005	$  40	$102	$  59	$  92	$  65	$  93
Ave	$164	$215	$124	$148	$100	$130
SD	$  93	$  75	$  50	$  39	$  28	$  23

Table 1. Net income per acre for crop share arrangement by crop in Ohio from 2005-2011.

 

Income Variability

One of the notions of why there is an increasing trend toward cash rental rates and away from crop share is the idea of income variability for the landowner. In Ohio, cash rent had been stable from 2005 through 2007 and then increased 50 percent by 2011.  Cash rents for this time period were $128 per acre with a standard deviation of $21/acre. In comparison, the 50-50 crop share arrangement was much more variable with a standard deviation of $61 with a mean of $137 per acre. The 1/3-2/3 crop share arrangement had a mean of $172 per acre with a standard deviation of $50. An examination of Table 2 shows substantial net income variability by rental arrangement over time with 50/50 crop share arrangements having the greatest variability.

 

Year	Cash Rent	50/50	1/3 crop
2011	$163	$214	$239
2010	$151	$205	$221
2009	$128	$113	$178
2008	$124	$100	$154
2007	$111	$174	$182
2006	$111	$  99	$131
2005	$111	$  52	$  96
Mean	$128	$137	$172
SD	$  21	$  61	$  50

Table 2. Net profit per acre for different rental arrangements in Ohio from 2005-2011 with 38% corn, 52% soybean and 10% wheat planted annually.

 

Discussion and Implications

Clearly there was greater income variability with crop share arrangements than with cash rental arrangements. During the most recent seven years, cash rents have been on a steady climb upward, so the variability in terms of highs- and lows did not exist. This may not be true if there is a significant recession in the agricultural economy in the future.

Crop share arrangements have had substantial variability as a result from increasing input prices, crop yields, and crop prices over time. Between 2005 and 2007 corn prices ranged from $2.00 to $6.10, soybeans from $5.66 to $11.70, and wheat from $3.38 to $6.90 contributing a substantial portion of the variability in net profit. For individuals that are dependent on a steady income from agricultural property, crop-share would be less attractive, especially the 50-50 arrangement which has not been substantially better than cash rent for the past seven years.

The 1/3-2/3 arrangement has about the same variability as the 50-50 arrangement resulting in significant income differences by year, but it has outperformed the other arrangement during this period in terms of net income per acre. However, this arrangement is falling out of favor with the tenants because of the effective higher land rental rate.

Variability in net profits could be greater than reported in this paper because prices received by the landowner as a result of their marketing decisions. This analysis used the average U.S. crop prices for the selected crops, but the landowner could do substantially better or worse than this price. Also the percent of corn, beans and wheat grown on the landowner’s property as well as cropping rotations of the tenant will affect the landowner’s net income.

Summary

Landowners need to examine their ability to withstand income fluctuations from their agricultural land, their ability and comfort in marketing grain, and the tax implications of each rental arrangement before selecting a farm rental arrangement. Crop share arrangements have the potential to return a greater long term average income but the variability of income from year to year can be substantial. Cash rent arrangements are simpler, do not require any capital investment to plant the crop, and typically reduce income variability for the landowner.

References

Barry, P.J., Escalante, C.L. and Moss L.E. (2002). Rental premiums for share versus cash leases, 2002 Annual Meeting of the American Agricultural Economics Association, Long Beach, CA, July 28-31, 2002. Downloaded August 21, 2012 from http://ageconsearch.umn.edu/bitstream/19684/1/sp02ba02.pdf

Dhuyvetter, K.C., Kastens, T.L., and Outlaw, J. L. (1998) Determining cropland cash rental arrangements, Agricultural Communications, The Texas A&M University System, downloaded August 21, 2012 from http://www.agmanager.info/farmmgt/land/lease/papers/Cropland%20Cash%20Rent.pdf

ODA (2010). 2010 Annual Report, Ohio Department of Agriculture. Downloaded September 14, 2012 from http://www.agri.ohio.gov/divs/Admin/Docs/AnnReports/ODA_Comm_AnnRpt_2010.pdf

USDA (2013a). Census of Agriculture, downloaded January 15, 2013 from http://www.agcensus.usda.gov

USDA (2013b). Farm Services Agency, downloaded January 15, 2013 from http://www.fsa.usda.gov/FSA/webapp?area=home&subject=landing&topic=landing

USDA (2013c). National Agricultural Statistics Service, Quick Stats, downloaded January 15, 2013 from http://www.nass.usda.gov/Quick_Stats

Ward, B. (2012). Farm management enterprise budgets, The Ohio State University Department of Agricultural, Environmental, and Developmental Economics, Downloaded August 5, 2012 from http://aede.osu.edu/programs/FarmManagement/budgets

Ward, B. (2011). Farmland values and cash rents, TheOhio State University Department of Agricultural, Environmental, and Developmental Economics, Downloaded August 5, 2012 from http://aede.osu.edu/programs-and-research/osu-farm-management/publications

 

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