Frequently Asked Questions: Paul, How Do I Set a Good Rental Rate?
Updated: Jul 9, 2020
Back in September, I posted cash rents at the county level for Maryland and Delaware. The county cash rent averages compiled by USDA’s National Agricultural Statistics Service (NASS) is one way to see how your rental rate compares with others in the county. But you have to remember that it is an average and some cash rental prices will be above and some will be below that average. The other thing to keep in mind is that average may not always work for every operation.
Setting a cash rental rate is especially important for beginning farmers who may start out renting farmland as a way to enter agriculture. I’m typically asked the question: “Is $X a good cash rental rate?” My answer is usually, “I do not know if it is or not.” I give that answer because honestly I do not know. A lot goes into developing a good cash rent. Knowing if a cash rent is good for you depends on your individual costs of production and current commodities prices. If you have high costs of productions but higher commodity prices, you potentially can afford higher cash rents. Higher costs of production and lower commodity prices mean you potentially can only afford lower cash rent prices.
Resources to help you come up with rental rates your operation can support exist. Aglease101.org is a website created and maintained by the North Central Farm Management Extension Committee. The website includes a host of worksheets for cash rental rates, flex-cash rental rates, crop-share rental rates, pasture rental rates, rental rates for buildings, and livestock rental agreements. These worksheets typically need you to know your costs of production and estimated value of the crop. Another good resource is fairrent.umn.edu, a website which allows you to enter the same costs of production and estimated crop value to determine a break even rental rate (that is, what the highest rental rate the operation could handle and break even).
Both resources require you to know your costs of production, but if you are a beginning farmer you may not yet know all your costs of production. You can utilize enterprise budgets developed by University of Maryland Extension or other state Extension Services to get a basic idea on production costs. Another good resource is just talking to experienced farmers on what it typically takes to grow the commodity you are interested in producing. As you gain experience, keep track of your expenses and revisit the worksheets or the website regularly to see if you need to discuss revising the rental rate with your landlord.
In setting a cash rental rate, other factors could potentially affect the rental rate. These factors include land quality, location of land, soil fertility, buildings/grain storage on farm, size of farm, previous tillage practices, FSA farm programs, rent payment dates, terms of lease, reputation of two parties, and extra services provided by the two parties. You might willing to pay more if the farm has good soil fertility rates, has on-farm grain storage, and you are dealing with a reputable landlord.
On the other hand though, if the landlord is older and without family members in the area, you may assist that landlord by picking groceries, medications, mail, and so on whenever they are unable to do so themselves. These additional services may be enough for the landlord to consider taking a lower cash rental rate. As you can see, it’s not just about determining your costs of production but including other factors which are harder to place a monetary value on. But that is no different than making any other purchase; some options may influence you to want to pay more and some options or lack of options may influence you to want to pay less.
If you are curious about more leasing issues, check out the leasing page on the UME Grain Marketing page. There will also be leasing workshops sponsored by the Northeast Risk Management Education Center in January and February to better help you answer some of these issues. The first will be Dec 2 in Chestertown at the Kent County UME office. For more details, click here.