High commodity prices benefit farmers, but they could be driving up rents farmers pay for land. Farmers in some areas of Louisiana are seeing land rents increase dramatically, according to Kurt Guidry, LSU AgCenter economist, and this could hurt their bottom line and affect production decisions.
“Naturally, a landlord will see those high commodity prices and think he has to have his cash rents increased to have his percentage of gross revenue remain roughly the same,” he said.
But, Guidry said, this isn’t necessarily a fair assessment. Farmers have seen steep increases in the costs of fuel, fertilizer and seeds.
“Even though commodity prices have increased and gross revenue has increased, it’s costing a lot more to get to that gross revenue. So, from a producer’s standpoint, basing rent on gross revenue could lead to financial difficulties for that producer,” Guidry said.
What a landowner may charge in rent can vary widely. Guidry said local supply and demand for agricultural land in the area will be a driving force for what a producer has to pay and what a landowner will receive.
The economist said rent could account for 10 to 15 percent of a farmer’s total production costs – higher on more valuable land.
“Land rents are unique to the land. Each piece of property has different production capabilities,” Guidry said.
Many farmers have share-rental agreements, where landowners get a share of the value of the crop as payment. But, Guidry sees more landowners moving to cash rental arrangements, which set a fixed price.
He said landowners want a more fixed income stream. Moving from a share to a cash rent agreement does that for them. But, this is leading to high fixed rents, which may not be fair to farmers if commodity prices drop, production costs are up and yields are down.
Guidry said farmers could consider a payment method he called a share of expected net return.
“In that case what you would do is estimate gross revenue for that piece of property for growing that commodity. Then you would estimate the costs of growing that commodity and figure out what you have left over. This leftover would be shared between the landlord and the producer in terms of cash rent,” Guidry said.
Producers also should be aware of comparable land rents in their area.
Guidry said farmers should get a long-term rental agreement. But the costs in the agreement should be revisited each year and take into account five- to 10-year averages for commodity prices, yield fluctuations and changes in government farm policies.