Thousands of you wanted to know: Are farmers rich? And after you read that post, you had more questions about some of the ideas I mentioned within the post – namely, what exactly is cash rent?
Well, hang on to your hats because I’m about to boil it down for you in the simplest terms I can muster. Read on to the end – even through the hard stuff – because if you want to understand farming, this is a concept you must grab hold of.
WHO OWNS THE LAND?
The average farmer does not own all the land he farms. He probably owns some of it, but the farmer who owns every single acre he farms is rare. Honestly, this hasn’t changed much over the years – farmers have never owned a majority of the land they farmed – but the move to an “absentee landowner” might be relatively new. This change has happened over time, as older generations pass away and leave the farm to their three (or ten) children in equal parts and then not all children remain on the farm.
Around 75 percent of the land in Illinois is owned by a landowner who is not a farmer. Most of that ground is farmed by a family farmer who is renting the ground or farming it in a crop share agreement.
A CASH RENT AGREEMENT
Cash rent is really a pretty basic concept. The farmer bids on the ground, the landowner makes a decision on the farmer she trusts the most who will also give her the highest price per acre, and a rental agreement is signed. The landowner now has nothing to do with the farming that occurs on that acre, except that they get a set amount of income every year for its rental.
This is really no different from renting an apartment or leasing a car.
The landowner DOES have a responsibility here. Just like the property owner cares about how you treat their apartment and the car dealership is interested in the condition of your leased vehicle, a landowner must consider the farmer they rent to very carefully. If they rent to a farmer who is not careful and environmentally conscious of the quality of the land and water they own, they actually lose value on their property. But the landowner does not have to truly understand the ins and outs of farming under this scenario.
CROP SHARE AGREEMENTS
Crop share – also called tenant farming – is an agreement where the landowner and the farmer work together to grow and harvest a crop on an acre. When a farmer and a landowner enter a crop share agreement, the farmer and the landowner split the cost of the inputs for that acre (remember how expensive that was?) AND split the income or loss from that acre. The landowner is giving the acre, the farmer is giving the labor and equipment, and the two share in the profits or losses.
In this sort of scenario, the landowner must have at least a basic understanding of the agricultural industry. He is paying for a portion of the fertilizer, chemical, seed, etc that is going onto that acre. He will then receive his percentage of the harvest and would market the grain himself to earn the maximum net profit on his ground.
(It is important to note that these agreements can vary widely. Some agreements might be a 50/50 split on cost and income, some might be 70/30 or anything in between. Some agreements might have the farmer marketing all the grain and just splitting the income, some might have the landowner marketing his own grain. Each contract is what works out best for this particular landowner and farmer. The point is, they do it together.)
WHICH AGREEMENT IS THE BEST?
Hopefully, though these descriptions are brief, you can see pros and cons to each sort of agreement. Farmers can benefit in either. In a crop share agreement, farmers benefit in a bad year because they share a portion of the loss with the landowner, but they also share a portion of the gain in a good year. In a cash rent agreement, farmers benefit in a good year because the landowner does not get a percentage of the gain, only a flat fee. In a bad year, cash rent agreements are a doozy for farmers.
And then sometimes in a crop share agreement, farmers find it difficult to work with a landowner that maybe doesn’t understand much about the farm business, yet has to understand and review every decision. If the cash rent is low enough, maybe the farmer feels it is in his best interest to absorb that risk and eliminate the necessity of reviewing every decision with the land owner.
Different farmers prefer different agreements. There is no right or wrong answer.
Statistically, the two agreements are used in about equal proportion in Illinois. In some regions, cash rent is more common and in other regions, crop share is preferred.
Each of these agreements manifests itself in so many different forms that we couldn’t really understand them all here. As an example, farmers can enter into a Variable Cash Rent agreement where the rent they pay for an acre varies on the profit they are able to make in a given year. This allows the farmer to manage some risk, but allows the landowner freedom from understanding every decision. Of course, landowners may prefer to have a guaranteed income they can budget for instead of a fluctuating income that depends on profit margins so for some, this just doesn’t work.
WOW. THESE DECISIONS ARE INTENSE.
Listen, I’ve been preaching it for years, but farming is an incredibly complex way to make a living. Farmers are businessmen who are weighing these decisions every day. Many farmers have college degrees in economics or agribusiness to help them wade through an overall understanding of all the complexities they will have to deal with as farmers.
It’s really so much different than going to work and getting a paycheck every two weeks which is how most of us live. Having an awareness of that alone will change the way you view the family farmers that grow your food.
ICGA/ICMB Marketing Director
Have any other questions? Make sure you leave them in the comments!!