The economics of rented land: How much is rented land costing you?
The other day at a producer seminar, the following comment was made by a farmer that presented some introspection. “I don’t like to give up rented land, even though I’m losing money on it. I never know when I’ll be able to rent the farm again because the competition is very intense in my area.”
This is a common dilemma among many individuals as I crisscross North America.Hedge funds and larger producers will swoop in and intensify competitive forces as the older baby boomer farmers bow out, seeking returns to use for their retirement. The squeeze play is on! Often, control of the land equates to who has the deeper pockets. During times of low margins, the intangibles such as maintaining or improving the quality of resources and conservation practices often go on the back burner.
As a downward economic cycle called the “grinder” continues, one must ponder how much cost is required to continue farming? As one lender indicated, it appears that some are doing recreational farming. In this producer’s case, he or she would need to determine how the profit and cash flow losses impact both earned and appreciated equity.
First, one would divide losses into working capital. Working capital is a measure of liquidity calculated using current assets minus current liabilities.This would determine a strategy in farming rented ground at a loss and how much time the operating aspect of the business can sustain a loss to retain the rented ground.
Next, the losses would be divided into equity in land, machinery, and livestock. Take intermediate and long-term assets and subtract term debt to calculate equity. Divide those losses into the equity to illustrate the resilience one has to sustain losses and to continue farming the rented ground at a loss. For example, if the total value of land, machinery, and livestock equals $1,000,000 and total term debt is $400,000, equity equals $600,000. If the annual losses from farming are $60,000, then the operation can sustain farming at a loss for 10 years. However, it is important to realize the strategy of farming at a loss will burn through equity in the process.
As this economic cycle continues, cost adjustments and critical thinking are going to be crucial conversations that should be a high priority for farm families everywhere. So how much is rented land costing you? This is a tough question. The answer will vary by operation and by the goals of the managers, owners, and landlords. However, some serious pencil pushing, or in this case punching the computer buttons, must occur to ensure equity gains over the years and earned net worth are not being eroded away too quickly.