Consultant: Flex rent deals must benefit landowner, operator
FARGO, N.D. — Farmers tend to want to negotiate flexible rental arrangements when commodity prices are bad, but the deals are easiest negotiated when times are good and landowners receive sizeable bonus checks, according to a farm business consultant.
"You are a salesperson, with your landowner in a customer-supplier relationship," said Nick Horob of Fargo, N.D., a consultant and founder of Harvest Profit Inc., a software product for the business of farming. Horob spoke Feb. 1 at the Northwest Farm Managers Association annual meeting in Fargo.
Originally from a farm near Williston, N.D., Horob graduated with a finance degree from the University of Minnesota in 2007 and worked with a private equity firm in Minneapolis before moving to Fargo as a consultant in 2009. He is part of the MarketWise Ag Services group and serves 33 farm clients with about 400,000 acres in the Dakotas and Minnesota. Clients range from having 1,200 to 40,000 acres of land.
Horob estimates that only about 2 percent of today's land rental deals are flex rent deals, in which the farm operator pays a base rate and then shares a "bonus" with the landowner if the crop and price structure turn out favorable. One of the reasons deals aren't made is that both parties fall victim to "recency bias," meaning there is a tendency to extrapolate recent events into the future indefinitely. "Now, in this lower price environment, it's pretty easy to think that these lower prices are going to be around forever — that's human nature," he said.
Horab's tips for farm operators on how to negotiate flex rent deals:
• Focus on how to make flex rents benefit the landlord first. "Too often farmers propose a flex rent deal based on what's in it for themselves versus what's in it for the landowner," he said.
• Don't drown landlords in excessive detail. "It's really easy to throw in more and more variables and the landowner's eyes gloss over and they say, 'Cash rent.'" Horob said. Don't add more stipulations than necessary.
• Establish flex rents during the next up-cycle in commodity prices. It might be wiser to pay bonuses to landlords in good times to secure long-term flex deals, rather than trying desperately trying to reduce taxes by over-investing in equipment.
Sometimes long-term flex rent contracts can be linked to an incentive of making operator-paid investments in infrastructure such as tile drainage, irrigation or grain bins. If these investments are made, the deal may require a pre-agreed buyout arrangement.
Horob offers clients an array of formula schemes, available for free at harvestprofit.com/flexrent. One that he likes is the so-called "fixed bushel" lease. "That is, pick a bushel amount that represents anywhere from say 25 percent of the gross revenue up to 35 percent," he said. "A crop that has a higher fertilization requirement and higher seed cost — corn, for example — might stick to the lower side of this range."
Horob used the example of a farm in Cass County, N.D., with a 160-bushel per acre average corn yield that 25 percent would 40 bushels. Half of that — 20 bushels — would be priced at the spring crop insurance price, and the other 20 bushels would be priced at the fall crop insurance price. "You can pay half in the spring and half in the fall, with the contingency that each payment has a $70 per acre minimum," he said, adding, "That way, landlords who need the income to live on will where it is coming from."