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Financial Conversations with Fitz #30 - What About Rent? - 08/04/2009

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Is the sun out??  Might hit 90 this week…  Crops are looking good, but a little inconsistent in spots.   Degree days are at 1590 in Kanawha.  Last year on this week we were at 1605, so not much difference, a bit behind….We are behind 237 average at this point. Grain prices still crazy!!!!   CASH FOR KLUNKERS WENT KLUNK…..It looks like congress is looking for another $2 billion to finish out a good program for dealers….. 
New month of August….State fair and school camps starting…Where did the summer go??  Delivered our check for $4,709 to the pools of Thompson, Tike and Forest City for equipment last week from the employees and ownership of TSB.   The employees had lots of fun raising the money.   Our wild shirts and Green Shoes survived the summer.

We start out August with the big Ag question on “what should we charge or pay for rent?”  Last year spread in this area was $110 to $275 plus in Hancock and Winnebago..    Corn dropped a bunch the last six weeks as well as beans.  There are a series of Leasing meetings throughout the state this month.  The closest ones to us are August 66h in Forest City on Thursday this week at 2:00 at the TSB Community Room.   It is sponsored by TSB and ISU Winnebago County Extension.   There is another one the same day at 6:30 at NIACC put on by Extension of Cerro Gordo.  The state law says we must notify  landlords/tenants of changes in next crop year by August 31st.  The tough thing about pricing for corn/soybeans is the volatility (corn and beans on CBOT has certainly been erratic).   With large swings  per acre in corn and beans and inputs it makes it difficult based on the tenants expenses.  So what factors go into determining a rental rate:  market/neighbors, avg yields, CSR, Share of gross value, return on investment, crop share equivalent, tenants residual…..The management specialists from ISU Extension will review each of these at the meetings being held.   The toughest thing that I look at is the actual cash flow from a particular piece of ground and the management ability of the operator. 
Two key points to review in our short time today…How to handle $237 swings in the price for corn/acre….Flex agreements based on price only…There are challenges in format with this on which date to price…Also tax/social security issues and FSA.  Does the landlord want or need to worry about what the price of corn is doing when they want one figure to keep track of.  Should my 85 year old mother worry about the price of corn?   Should they settle for less to have a reasonable base?  Should the rent be paid in advance or in two payments at beginning and harvest?    The other is the cost of inputs for the tenant….I ran a projection yesterday using expected prices of inputs for 2010 crop.  With 200 bushel yield at 4.24 for 2010 with $200 rent the tenant loses 110.00/acre.     Fertilizer costs are directly related to the oil industry.  I feel it is important for any landlord to keep a good tenant at a reasonable rate.  With the high cost of inputs and the importance of a good fertility and pests program some ‘ above market rent rates tenants’ can greatly affect the these factors in just one year.   So you see there are so many variables in just these two factors that landlord and tenant need to meet with solid figures to work together to get “fair rental” rates. 

So, be sure to check out our meeting co sponsored by TSB and Extension on Thursday August 6th at 2:00 with another meeting at NIACC on August 6th at 6:30.  There is a great work book available with forms and data that both tenant and landlord should review at both meetings.
Be sure to talk with your financial person after you have been to one of these meetings.

For more information, please contact any of our Ag Bankers at any of our three offices in Forest City, Thompson and Titonka.

Remember that you should deal with people in community banks and organizations.  When you work with them, you know that you will also see them sitting with you at ball games, church or community events.  So, if in doubt give us a call.