Cropland Value, Rental Rates, & Other Agricultural Information
Alabama Department of Agriculture and Industries cites that 43,000 plus farms spread across 8.9 million acres throughout our state, averaging about 206 acres in size. Alabama the beautiful displays it’s strength in agriculture. In fact, one out of every 4.6 jobs is related to agriculture; and the industry generates an approximate 70.4 billion to the Alabama economy. The Southeast rates for cropland and rent can vary from year to year. Averages increase and decrease for a variety of reasons so let’s cover what possible factors are contributing to that.
The two main types of leases are cash rent and crop-share. The key difference between these two types is how risk is shared between the owner and the lease holder. Other types of leases are livestock-share, labor-share, and flexible-rent leases.
A cash rent is a fixed payment for the use of buildings, land, and other facilities. The payment is for a particular length of time that is determined and set prior to the tenant utilizing the asset. The owner is compensated so they get a return on the investment on things such as the following: payment of taxes and insurance, repaired buildings, other improvements, and a recovery of depreciation on some assets. In return for paying the owner, the tenant receives all income.
With cash rent, financial risk lies mostly on the tenant whereas the only risk the owner faces is if the tenant is not able to pay their rent. Consequently, it is a fairly reliable income, the owner can expect a cash rent lower than the projected return from a share rent agreement. The tenant has all the concern for production and pricing meaning they will receive all profits in a good year and all losses in a bad year.
A cash rent agreement will consist of the amount and terms of payment, the time period, and any restrictions that the owner may place on the use of buildings, land, or facilities. For land, the time period is usually one year, although an agreement may be multi-year with or without provision to reassess the payment each year. The owner may include restrictions on the maintenance of buildings, fences, canals, etc. Otherwise, the tenant is free to make all operating decisions; the owner usually does not have any management input.
Determining factors of a rental rate
- What others are paying/charging
- Average yields
- (CSR2 index) Corn Suitability Ratings
- Share of gross crop revenue
- Crop share equivalent
- (ROI) Return on investment
- Tenants residual
Food for thought: The most common method of an established rental rate is typically based off what others in the area are charging. However, this assumes their rate is legitimate as well as equitable. Keep in mind, a rapidly changing market can effect rates and most tenants/landowners are looking for someone to tell them what a fair rate is. Quality of land, productivity, and actual yields from those other properties are what your main focus should revolve around when determining and setting your rates. For more information on current Southeast averages click here.
Maximizing the Return on investment
Proper farmland management is key for investors to appropriately capitalize on the essential value of the asset. Having or becoming a knowledgeable, professional farm manager to implement a customized plan can align interests between farmer and landowner, as well as maximize and improve farmland and ROI. Farming today is more than just production it requires landowners and farmers to address the following:
- Capital improvements
- Additional revenue opportunities
An oversight in any of these vital areas can potentially result in substantial loss of ROI. With progressive farm management in place you can anticipate much higher profitability and avoid significant damages to the property, as even one mismanaged year may cause. Land is debatably the most crucial asset to sustaining life for our fast growing population. It offers opportunity for housing and farmland itself is essential to feeding the population.
For Alabama soil survey information click here.
For information on conservation management click here.