Market News & Headlines >> Brock Consultant Katie Hancock's Block: Renting Instead of Farming to Generate Cash Flow
I’ve observed an uncommon, but interesting strategy to improve cash flow: Active farmers are cash-renting owned ground to another operation. It sounds bizarre at first, but ultimately it makes sense.
Things we know: cash is tight, profit potential is small, and farming is cyclical.
One can always sell low-debt property to improve working capital, or more simply stated, improve cash on hand to cover expenses. Selling highly leveraged property may also help if it reduces current liabilities. Either may be a viable last resort. But what about those that aren't in a desperate situation? They can simply rent property to someone else. This won’t work for everyone, but it minimizes cash needed to put in the crop and reduces the risk of losing money on those acres. If someone is willing to pay a cash rent that exceeds the projected return, the land owner has figured he or she will come out ahead.
What about fixed expenses like machinery? I would ask how fixed these equipment costs really are. It's possible the per-acre fixed expenses on equipment are minimal. We think in terms of paper depreciation, but in reality, the equipment will run over fewer acres. The farmer willing to cash rent the acres may need volume to cover leased equipment payments whereas more stable operations tend to own the equipment.
Why not sublease the rented ground instead? I think this move would create a distrusting relationship. Most landlords would frown upon such a move—especially if they weren't in on it up front. Assuming the goal is to keep control of the land, you would have to "play games" with your own property.
What will the active farmers who are leasing owned property do long-term? In my opinion, they're buying time and will take back the land when the time is right. I doubt these are long-term leases.
It's definitely an outside-of-the box strategy. We have been challenged to improve working capital, so it's worth noting examples of creative thinking.
Email Katie at [email protected]