AgriVision Podcast Episode 6 – Know your cost of production before renting more land

Katie Wantoch

This is UW Extension’s Farm Management “AgriVision” podcast. I am Katie Wantoch, Agriculture Agent with UW-Madison Division of Extension. I will be chatting with fellow Extension educators as we answer questions from farmers and share our knowledge and expertise on how you can improve your farm management skills.
Today I am joined by Simon Jette Nantel who is a professor with the University of Wisconsin River Falls. And good morning, Simon.
Simon Jette Nantel
Good morning, Katie.
Katie Wantoch
And Simon today our question for you centers around some machinery. And our neighbor, the farmer in this case is 74 and has decided to retire this fall after he harvest his crops. The neighbor has 250 tillable acres. The neighbor has asked me, the farmer, if I would like to rent his land for $175 an acre. That’s the average rental rate where this farmer is located. And so this farmer is wondering if he should offer a lower rate of $150 an acre if crop prices aren’t going up, and the farmer is not sure how profitable growing corn and soybeans is going to be in the next year. This farmer and his son also owns 360 acres and milk 100 cows, and indicates their machinery can handle the extra acres. So what are your thoughts?
Simon Jette Nantel
Yeah, thank you, Katie. I think that’s, that’s an interesting question and one that comes up quite often. And the first thing you have to think of is also there are some short terms aspects to it. And first of all, like, you can look at your costs, and what are, you know, what kind of costs you would need to recover to make that a good deal on the short term versus the long term. And you also have to think about the long term because being able to have control over the land or having that land available. Potentially for some expansion, the farmer here is talking about having their son on the farm. You know, it becomes a very strategic decision. Do I need those, those acres for future expansion to keep this farm viable in the future? So you have to think long term.
But let’s first, let’s first start I mean, the question the farmer is talking about a good price that he was asked to pay $175 and maybe wants to offer $150. And he’s not sure if corn is going to be profitable next year. My advice there would just be, start by trying to build some budget to try to understand the cost of production, your revenue is five times yield. So if you can expect 170 bushels or something in that ballpark at $3.50, maybe as an average price for corn and you’ve got $600 of revenues, it might be more than that, depending on the region you’re you are or less than that, then I would focus on the cash, the operating costs, seeds, fertilizer chemicals, the fuel drying costs all those things, mostly because the farmer here is mentioning that they have their fixed costs, mostly covered their machinery can handle that. So in the short term, like just for the next year, does it make sense you know what the maximum rent that you could pay, you’d have to take your yield times your price minus those operating costs. So if you end up and then when you take your price minus your yield, times your yield minus your cost, if you end up with $250 as kind of your margin there, you have to keep in mind that that $250 is what you have to pay rent, to pay labor, and eventually also to cover some of the machinery depreciation on that or replacement for machinery in the long term.
So how do you want to allocate that $250 that you’ve got as a margin? How much do you need to cover for your labor? Is it 75 bucks? Is it 100 bucks per acre? That would be up to you to decide. And then and then you get your number for what you can allocate for your rent. There’s going to be a risk involved, obviously, but that’s part of doing business. And I think all farmers know that. And it’s, it’s a matter of, it’s a matter of saying like, how would you use that corn? Are you going to sell all of that? Are you going to be using some of that for your herd? You know, and what kind of price you could lock in for that. But that’s kind of the exercise that I would do here. One thing about, you know, offering $150 per acre, I’m going back to the strategic aspect of it is that if you think, if you think that you want, you need that land for maintaining the viability of the farm in the long term, potential expansion plan. How hard do you want to be on the negotiation here with that neighbor? How much you want to try to build the relationship to maybe have to have an advantage, if that land ever comes to sell, to be sold in the next, you know, four or five years, that might be something to think about.
And then finally, the other thing, if the farmer here is mentioning the aspect of risk, there’s always there’s always the possibility instead of offering a cash rent to offer a flex, a flex rent that would be based that would reflect maybe some of the yield risk, maybe some of the price risk or combination of both. But there’s some information available to structure, flex rent type of deals, and maybe there you can, you know, you can say, Well, if the year turns out to be a good reflection of what happened on average over the last five years, you’ll get your $175. But if prices of the yields are not as good, then maybe you’ll get a little bit less than there you can share the risk between you and that neighbor and that might be an option if, if risk is the big concern here.
Katie Wantoch
Oh, great, Simon. And, you know, you mentioned there’s some resources that are available both for maybe calculating your cost of production, you know, looking at what that revenue could potentially be, and as well as those variable expenses, and that flex lease arrangements. Do you have any resources that you can share with our listeners?
Simon Jette Nantel
Yes, I mean, in terms of budgets, I know the University of Minnesota has a number of budgets that are online. The University of Iowa Extension also has a number, Illinois, also has a number of them. Those are all tools that can be used to just have a quick look at what are the average cost. Now, the thing is, you always have to adjust them for your own reality. And so I think, you know, especially in the case of this farmer where they don’t have to worry so much about the machinery cost. The thing is to look really at how much did you pay for seeds, fertilizer, chemicals, and those operating costs. In terms of the flex lease, AgLease101. And that’s something that describes, from cash rents to crop sharing, to all of those different types of flex leases that can be arranged. And those resources are available.
Katie Wantoch
Yeah, at aglease101.org (https://aglease101.org/). And, as always, we have a lot of information on our UW-Madison, Division of Extension Farm Management website. And that’ll be posted in our links below our podcast series for our listeners to go and find a lot of more information besides so what we’re talking about today. So thank you again, Simon, for your time today, very much appreciated, and I look forward to chatting again soon.
Simon Jette Nantel
Thank you.
Katie Wantoch

For more Extension “AgriVision” podcasts or resources to improve your farm management skills, check out https://farms.extension.wisc.edu/. Thanks for listening.