By John Kirkpatrick
When I sat down to write this commentary, I thought of a number of topics I could discuss: the great value we have found for both investors and operators through a number of sale-leasebacks, how land values have increased substantially over the past twelve months and why, or the dry weather we have had here in Iowa to start the growing season.
However, I thought this would be a good time to share a few of my thoughts on why farm management for absentee landowners is more important now than ever.
This time last year corn was under $4.00 a bushel, plus a lot of uncertainty due to the pandemic. A month later, a derecho hit Iowa impacting crops across the state. A couple of months later there was a presidential election with far reaching implications for the corn belt. Now, corn is over $6.00 a bushel and land prices have spiked as inflation fears have investors turning to farmland as a hedge. To say that the past 12 months have been an emotional roller coaster for farmers would be an understatement. The same would be true for many landowners, depending on their farm lease structure. If you’re a landowner with either a crop share lease or a custom farm arrangement, then you probably have been checking commodity prices daily and riding the same roller coaster as many farmers have. For those landowners under a cash rent agreement, their farm has been both out of sight and out of mind. As commodity prices have ticked higher and higher this year they’ve watched from the sideline – with money left on the table due to their cash rent lease with no bonus component.
There are several different ways to lease your farm as a landlord, each with a different risk/return profile. Custom farming and share leases have the most skin in the game for the landlord, with the potential for the landlord to lose money in a lean year. However, both of these methods offer the greatest return in good years. Whereas a cash rent or a cash rent with a bonus lease structure offer up-front payments from an operator to lease the land from a landlord, meaning there is a minimum return realized at the beginning of the growing season. This offers the least amount of risk but potentially lower returns in years where both prices and yields are high. A popular hybrid option, a cash rent lease with a bonus payment component, offers the landlord the opportunity to participate in the upside if commodity prices increase, as we have experienced thus far in 2021.
A farm manager can tailor the lease to your risk profile and offer expert advice – not only on how to lease the farm not only on how to lease the farm but offer access to the area’s best operators. Farm managers also deliver peace of mind as the farm transitions to the next generation. A farm manager can make estate transitions much easier for families as they can offer knowledge and experience to heirs that do not have the desire or expertise to manage the family farm. A farm manager’s ultimate task is to lease the farm in a manner that best fits the landowner’s risk profile while overseeing the long-term health of the land.