A simple nod, followed by a firm handshake, is how many farmers and landowners arrange short-term land rental agreements. But it's a luxury many of them no longer can afford, says one expert.
As economic conditions worsen, he says it behooves farmers and landowners alike to formally spell out these rental agreements. Most important from the farmer's perspective, land rental should be managed like any other risk factor associated with farming, says Max Runge, an Alabama Extension economist.
“With spiking input costs and market uncertainties, producers are going to need to manage their risks as best they can, and land is no exception,” Runge said.
Currently, the majority of Alabama land is rented on a year-to-year cash basis, with most of these transactions based on oral agreements.
Along with other factors, Runge predicts that tighter lending practices will compel more farmers to negotiate more formalized land transactions in the future.
“Banks already are cracking down and asking agricultural borrowers for more detailed information about their operations,” he said.
Also, as farmers deal with spiking operating costs, many may want to look at ways to better manage long-term soil fertility — an option that is not practical with short-term rental.
“In these cases, they may want to secure a long-term lease to improve fertility,” Runge said. “The problem now is that producers who aren't sure about the availability of land from year to year aren't going to invest in fertility, even though this could prove highly worthwhile in the long run.” Landowners also may benefit from this fertility enhancement.
The important thing is for farmers and landowners to develop carefully spelled-out agreements, which are signed by both and provide mutual benefits.
One option would be an agreement in which the landowner and producer alike share in both expenses and revenues, Runge says.
“This would be whatever the two decide to work out among themselves,” he said, adding that a lot of this would depend on the location and size of the fields.
In addition to being carefully spelled out, the agreement should also include all projected costs. “Out-of-pocket costs are really easy to determine,” Runge said. “What often isn't as easy to determine are machinery and fixed costs. These need to be clearly specified in the agreement. Rental land prices vary greatly depending on one's location.”
“In cases where a farmer is the only row-crop producer in the area, there may not be a lot of demand and land rent may not be that high,” he added. In other locations throughout the state, competitive pressures for rental land may be especially strong. “In those cases, when farmers find land, they need to do everything they can to hold on to it for as long as they can.”