Managing Risk will Improve Profitability of your Farm

Have you ever thought about managing risk on your farmland?

Year in and year out, what is the most important thing every farmer can do on your farm? I know what you are thinking, pay your landlords, on-time. And in some cases I have heard that being an issue this past year. That is a good answer, but not quite what I was shooting for.  I am going to assume that personal responsibility for your bills is in place at this point and if it isn’t, you call me.

This plays a big role in how profitable you can be as a landowner when you already have a good tenant. Is it what crop or seed gets planted, is it whether they do tillage or not? Is it the fact that they drive a tractor that is green or red? What about when the farmer plants and when they harvest? All of these decisions do have an impact on the farmers’ bottom line, but I would also say that they could be included in this one thing: How well does the farmer manage risk? As the landowner, you may be asking why that affects you. Isn’t it the farmers who ultimately makes decisions to reduce risk and works with the weather to get the most out of the crop? You are correct to a certain degree, but reducing that risk on your farm does impact the profitability of the farmer.

Types of Rental Relationships

One thing to consider is the type of rental relationship you have with the farmer. The most common are the crop share, in which you both shoulder some of the risk, or the fixed cash lease which is low risk for the landowner but high for the farmer. The flexible cash lease is increasing in popularity because it is the best of both worlds. I will not get into the differences between them today but have included a link to a post I wrote previously.

So how does reducing risk on your farm Farm impact the profitability of the farmer?

If you look at the differences between three rental rates, why are there differences? If cash rent in Iowa is $235/A on good soils, $200/A on medium soils and $175/A on poor-quality soils just as examples, why the $60 spread between the best ground to the worst ground? Because there is more risk and less upside potential with poorer quality soils.

One of the biggest issues that reduce yield potential is how well the field manages air and water. Is ponding an issue or is there just no way to get water off of the field? This has a considerable impact on the farm yield, which means less income per acre for the farmer, but also means less income for you the landowner because there is more risk to farm it. There are many factors that affect rental rates which really means risk management on your fields. Some of them include soil quality, air and water management, fields’ size and shape, what crop is being produced, as well as typical supply and demand for farmland.

Take the time, talk to the farmer renting your land, and talk about what risks impact them and you. Then put together a plan to address these issues. It may mean some up-front expense but the return will be positive.

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