How to Reassess a Bad Cash Rental Agreement

May 15, 2023

Farming requires trust. As a landowner, you need to trust your farmer to make good decisions about your land. 

Lack of trust is a recipe for stress, anxiety, and, ultimately, a poor return on your farmland investment.

In any farming partnership, there are multiple interests at play:

Everyone involved in a farming partnership must balance these interests. Most of the time, a misalignment comes down to one factor: the land rental agreement itself.

Whether you have a formal contract or a handshake agreement (which, by the way, we advise against), a poor land rental agreement could be the source of your financial and farming woes.

In this article, we’ll walk through some of the key factors of a bad partnership, and some tips for reassessing your cash rental agreement if necessary. 

Assessing the quality of your cash rental agreement

Cash rental agreements are a popular method for generating income—and with good reason!
For you, the landowner, it’s a low-risk way to generate some liquidity from your asset. 

But you know what they say: the higher the risk, the greater the reward.

Farm economics change from year to year. We’re currently seeing record high prices for corn and soybeans, for instance. If you locked in your cash rental rate five to ten years ago, it probably doesn’t reflect today’s more lucrative market. Which means your farmer is making off with all those benefits.

On the other hand, farm input costs have increased in 2023. In that regard, jacking up your cash rental rates too high may eat into farmers’ profits too much, making it difficult to find or keep a tenant. 

And, of course, as your land value increases, your rental rate should reflect that change. According to the USDA, the average value of cropland in the United States was $3,800 per acre in 2022, which was a 12.4% increase from the previous year. 

As a result, assessing the quality of your cash rental agreement is a complex and nuanced process. Too many landowners stick with a bad agreement just to avoid the hassle.

Unfortunately, this may mean that you’re missing out on profits. In this economy, that’s a mistake few can afford to make. 

4 warning signs of a bad cash rental agreement

It is essential to assess your rental agreement periodically to ensure it is still meeting your needs. Because If you feel that you are not getting the most out of your lease, it may be time to move on. 

So how do you tell that you’re in a bad cash rental agreement? Unless you’re out there in the fields day after day, it can be hard to tell. Especially if your primary source of information is the farmer.

Here are some of the early warning signs to watch out for. 

1. Increase in crop yields & productivity

If your crop yields increase year over year, that's a clear indication that your cash rental agreement is out of date. This means that your farmer has been paying the same flat rate to farm your land, but has been increasing his profits year over year. 

As a result, high crop yields mean that you need to increase your rental rates to take advantage of these opportunities.

Sometimes, there may be mitigating factors at play. The increase in farm inputs we’re seeing in 2023 may be one of them. So it’s important to have a nuanced conversation with your farmer.

But an increase in crop yields is, at the very list, a signal to start the conversation.

2. Soil depletion

Soil testing should be built into every cash rental agreement. The reason: these agreements incentivize farmers to maximize productivity, and they can often do so at the expense of the land.

While high cash rents may seem attractive, they often incentivize unsustainable farming practices that prioritize short-term productivity over the land's health—especially if the agreements are short-term. 

One solution is to ensure that your land rental agreement includes sustainable farming practices like crop rotation and conservation tillage. If you don’t have these provisions in place, then you need to seriously consider reevaluating your agreement.

3. Outdated policies

Often bad cash rental agreements aren’t the result of any malicious intent. They’re just the result of outdated policies that haven’t been updated. 

Your rental agreement needs to keep pace with the times. If you're stuck with old policies that don't reflect the current market or the growing value of your property, you’re probably not getting the most out of your agreement. 

Some of these factors can include: 

  • Increases in land value and market rates

  • Changes in commodity markets and crop prices

  • Soil and land health due to farming practices and climate changes

  • Updates to liability and insurance policies

  • Introduction of new technology or farming techniques

  • Changes in tenant's farming practices and experience

Keep your rental agreement up-to-date by reviewing it annually to ensure that it reflects current market conditions. In this case, it’s wise to enlist a legal expert's help to make sure your policies are legally sound and current.

4. Lack of communication

Effective communication is vital to the success of any farming partnership. If your farmer isn’t communicating with you well, then that’s a clear sign you need to reevaluate the partnership. 

Some of the hallmarks of poor farmer communication includes:

  • Delayed rent payments

  • Failure to report crop yields

  • Missed soil testing deadlines

  • Neglecting to mention any problems or concerns with the land

To keep your rental agreement on track, it's a good idea to set up regular meetings with your tenant. This helps you stay ahead of problems and strengthen the ongoing relationship. 

Openly discuss farming practices, crop yields, and any other concerns. If your tenant isn't on board with this approach, you may need to rethink your partnership.

Final thoughts on reassessing your cash rental agreement

If you come to realize that you’re in a bad cash rental agreement, you have two options.

Either amend the agreement with your current farmer, or part ways and find someone new. The specific action you take will depend on the primary problem facing the operation.

This is something you need to do on a semi-regular basis. If you don’t, then odds are you’re leaving money on the table. Your farmland is a powerful and profitable asset. So make the most of it!

Want to know if you’re missing out on potential profits? Check out our CashRentstimate tool to figure out the true value of your farmlands cash rent value.