Landowner/Tenant Issues in the Texas Rice Industry

Joe L. Outlaw
Edward Rister
Larry Falconer
Edward G. Smith

Issue Paper 96-3
October 1996

The Federal Agriculture Improvement and Reform Act of 1996 (FAIR Act) made several significant changes from previous farm program legislation. While the changes impact all program commodities (e.g., wheat, feed grains, cotton and rice), they have prompted considerable concern for the future of the rice industry in Texas. The major changes are:

Why Are These Changes So Important in Rice?

Historically, Texas rice producers have been heavily dependent on government program payments to supplement market income. Even with substantial government support, the number of rice acres in Texas has been generally declining. Under the new program, average rice contract payments per acre are large when compared to other program crop payments (Table 2). Using the state average farm program yields, rice payments per acre are nearly 4 times as high as those for the next highest commodity (cotton).

Low prices in previous years have prompted many producers to consider the feasibility of alternative enterprises. Although 1996 rice yields and current market prices are enabling many producers and landowners to realize profitable returns, there is uncertainty as to the level of future rice returns. In general, rice contract payments per acre are considerably higher than either current cash rents ($40 to $75 per planted acre) or the cash equivalent for many of the prevailing share agreements given recent year's market prices. As indicated earlier, in a cash rent situation, the operator receives the entire contract payment. Given the high contract payment levels relative to rents associated with many existing rental arrangements, there has been increased interest on the part of some landowners to either renegotiate or end their rental arrangements with their tenants.

The relatively risk-free nature of the contract payments, albeit only for the seven-year period (1996-2002), may encourage such renegotiations with some landowners seeking the greater security of the known fixed payment levels rather than the more variable share rents associated with fluctuating rice yields and prices. Landowners may wish to increase cash rents, change the share arrangement, or in some cases, end the lease relationship completely and keep the contract payments for themselves. It is the differences between current rental agreement rates and the per acre contract payments that is contributing to considerable discussion in regard to restructuring landowner-tenant relationships in the rice industry. This means that landowners will likely be asking for a larger share or higher cash lease amount. For example, a landowner who currently receives $70 per acre on a cash lease may see the estimated $116 per acre contract payment to be paid to the tenant as reason for wanting to renegotiate the lease agreement. The differences between rental rates and contract payments per acre are not as large for other program commodities. As a result, landowner-tenant relationships have not become an issue elsewhere as they have in the Texas Rice Belt.

The Economics of Rice Land Rents

Due to the farm program changes, landowners and tenants may wish to evaluate whether changes in the rental arrangements are warranted. This negotiation should be based on economic and financial considerations, not what the neighbor is doing, what is read in the newspaper, or being discussed at the local coffee shops. Tenants should prepare a rice enterprise budget, which can be used in the negotiations to show how alternative arrangements would impact their projected income and expenses as well as the amounts that landowners could expect to receive. A software program has been developed specifically for this purpose in the Department of Agricultural Economics at Texas A&M University. The software can be used to quickly evaluate the economic impact on both the landowner and tenant for alternative lease arrangements. The software includes several common share lease and cash rent tenure arrangements which may be used in evaluating returns accruing to landowners and tenants over the 1997 to 2002 period for a range of expected rice yields and market prices. The program is flexible so that users can customize lease arrangements and use their own enterprise budgets for evaluation. Anyone interested can contact their local County Extension Agent for information about how to obtain a copy.

Short-term versus Long-term

With rice enterprise production budgets it is fairly easy to estimate the economic returns to the landowner and the tenant given various rental arrangements and alternative enterprise possibilities for the next year. However, producers, landowners, lenders and other agribusinesses need to examine their economic options based on their longer-term expectations for alternative crop and livestock prices and costs of production. Some farmers whose land is suitable for other enterprises have viable options in crop production. However, it should not be assumed that this past year's prices are representative of those that will exist in the future.

There are important long-run implications associated with a shift out of rice production. The Texas rice industry is served by a highly specialized infrastructure, especially in terms of water delivery, and rice drying, storage, and processing. Recent declines in Texas rice acreage has placed this infrastructure in a very fragile position. A key question that is not easily answered is how much reduction in Texas rice acreage can the industry sustain before the infrastructure goes out of business?

If the rice industry infrastructure collapses, then what might have been a sound economic decision in the short-term could prove hazardous down the road. In the event rice production becomes more attractive to landowners in the post FAIR Act period, they run the risk that a viable infrastructure to support rice production will not be available in the future. And, a historically important cropping alternative for their land will have been lost. Similarly, there may not be a supply of tenant operators available to farm rice on rental acreage.

Previous attempts at identifying economically viable cropping alternatives to rice production have been futile for many of the soil and climatic situations. For these producers, their only option may be cattle production which is subject to wide cyclical price swings.

Ending the Lease Relationship

In some cases, after reviewing the situation, the landowner and tenant may not come to agreement and either may chose to terminate the lease relationship. As indicated earlier, when a lease expires, as long as the landowner properly notifies the tenant, it is well within his/her property rights to end the lease relationship and assume total control of the land. The landowner would then receive all contract payments up to the $40,000 per "person" payment limitation. By consulting with an experienced attorney, it may be possible to receive payments for more than a single "person" on a farm operation. To receive the payments, the landowner would then need to either farm the land, establish a new rental agreement with a different tenant, or at least maintain weed and erosion control as required by USDA-FSA. The following considerations should be kept in mind:

Summary and Conclusions

Renegotiation of land leases is a common phenomenon throughout agricultural history. Lease arrangements are largely predicated on tradition and the supply and demand of the local rental market. The specifics of tenure arrangements tend to be private (between the parties involved) and fairly rigid over time, subject to change only in the event of rather major changes in economic conditions.

As an example, the Midwest corn/soybean complex routinely experiences rising and falling cash rental rates, keeping pace with the level of net returns associated with these two crops. The prominent role of farm management consultants representing landowners contributes, perhaps in large part, to the seemingly continual fluctuation of rental rates in this region. In contrast, the much more static-to-declining nature of rental rates in the Texas Rice Belt accentuates the shock of the current situation. Historical returns occurring in Texas rice production in combination with few feasible enterprise alternatives have allowed tenants to basically determine rental rates. Tenure arrangements have also been driven by considerations of large landowners and operators in managing the effects of payment limitations. For the most part, however, supply forces have dominated demand, leading to a tendency towards lower returns to landowners.

The FAIR Act of 1996 allows landowners to reverse these market forces, at least in the short run, and many appear interested in these opportunities. Such actions have dire consequences for affected tenants in the short run, with potentially negative long-run effects for the total Texas rice industry.

Due to the importance of decisions made with regard to tenure arrangements, it is important to obtain and analyze good information before making any decisions. This will enable landowners and tenants to negotiate with a good understanding of the economic implications for both parties.