There are several ways farmland owners can earn income, with each model exhibiting different levels of risk and reward. The best choice will depend upon things like your level of capital reserves, your level of experience with farming and production agriculture, and your preference for investing in active or passive income opportunities.
It is important to note that farmland owners make money two ways: income from the farm plus increases in farmland value over time. The increases in value have been roughly 6 percent annually for the last 50 years, so to the farmland investor, the opportunities for income described below are in addition to any land value appreciation that may occur.
In this scenario, the landowner and the farmer are one and the same. Getting started as an owner-operator requires capital for land and equipment, business acumen, and extensive hands-on experience that is typically earned by working for more experienced farmers.
Buying a farm in order to become an owner-operator is less like making an investment and more like buying yourself a full-time job. While farming your own land can yield the highest annual returns over time and especially during the good years, it can also carry the most dramatic swings in profit and loss from year to year due to volatility in weather and commodity prices among other things.
With a custom farming operation, you hire farmers to grow crops on your land and pay them a set rate. Hired custom farmers typically provide their own equipment and labor.
As the landowner you typically pay all of the input expenses including seed, fertilizer, pesticides, etc., but you also keep all of the profit. The custom farming model is far less labor-intensive for the landowner than being an owner-operator. However, it is only a good fit if you have agribusiness experience, ample capital to cover input and labor costs, and the risk tolerance to endure the ups and downs of direct farming.
With a crop sharing arrangement, the landowner partners with a farmer. The landowner typically provides the land while the farmer provides the labor, inputs, and machinery to work the crops. While crop sharing is commonplace in the Arkansas Delta, the terms of this partnership often vary based on the farming economics and customs of different regions. For example, if the landowner is providing the land without any additional financial contribution, the landowner in Arkansas may receive 20-30 percent of total revenue from a soybean crop while a landowner in Illinois or Iowa may receive as much as 50 percent of revenue for the same crop type. It is also more common to see the landowner and farmer split input costs in the midwestern states under a crop sharing arrangement.
Averaged over several years, crop sharing may earn the landowner higher income vs. the cash rent model below, however, you also assume greater risk via exposure to commodity markets and weather patterns.
Cash Rent (Lease)
With a cash rent agreement, the landowner acts only as landlord. A tenant farmer pays a fixed dollar amount per-acre-per-year for the right to farm your land. The farmer uses their own equipment, assumes all input expenses, and, for the most part, conducts business as they see fit. In turn you collect an annual rent check, with some or all of this often collected before planting begins each spring. For productive row crop farmland in the U.S., this can range from below $100 an acre to well over $300.
Of all the income options discussed here, cash rents offer the lowest relative risk and require the least amount of activity for the landowner. Since many cash rent contracts are fully prepaid before planting season, this arrangement prevents landowners from taking on any crop risk from the farmers and prevents farmers from taking on any credit risk from the landowners. Cash rents are a truly passive income opportunity with relatively little risk.
For these reasons, AcreTrader investment offerings focus on this model for our investors.
Residual Income Opportunities
Depending on the unique features of your land and your level of creativity, you may also be able to secure residual income beyond your agricultural operations. Some common arrangements involve hunting leases, mineral rights, or renewable energy leases for wind turbines or solar panels, with these alternatives often creating a large portion of overall income from the subject farm.
There are many ways to earn income from farming your land, including several other unique business structures not discussed here. While cash rent agreements provide an ideal passive income opportunity and serve as a natural choice for those simply seeking diversification from other markets, each investor must decide what best meets his or her needs.
Carter Malloy is the founder and CEO of AcreTrader.
Editor’s Note: The opinions expressed in op-eds are those of the authors and do not necessarily reflect those of Arkansas Money & Politics or About You Media Group.