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Are Net Share Leases Hurting Productivity?

Net share leases are very common in the Mississippi Delta.  They typically range from an 80/20 or 75/25 net share where the landowner receives 20% or 25% of the production and does not pay any production expenses.  Generally, the landowner provides the irrigation (well, pump, gearhead) under this arrangement.

Being trained as an economist I wonder if the net share lease may be hurting crop productivity.  Economics 101 says profit maximization is when marginal revenue equals marginal cost.  Another way to say think about this is when the last one dollar spent on the crop generates an additional one dollar in revenue.  An illustration is provided in the picture.

An example would be the use of fertilizer.  The use of fertilizer can increase yield and help build soil fertility.  Under a net share lease, an operator has a disincentive to reach the maximum economic yield and build soil fertility.  An operator under a 75/25 who pushed fertility to the economic maximum would only receive 75% of the crop and incur 100% of the cost.  This operator would be worse off than if fertility was reduced to the operator’s profit maximization point.  This point is when the operator puts in the last $1 and receives $1.33.  Since, 25% goes to the landowner the operator would be left with $1 which makes the operator’s marginal revenue zero, i.e. the operator’s profit maximization point.

In my opinion from studying economics and reviewing productivity under different lease arrangements in our portfolio, I do believe net share leases are negatively impacting productivity on farms in the Mississippi Delta region.  The implications for a landowner under a net share lease will be lower long term profits and a farm worth much less than a similar farm performing at a higher productivity rate.  In order to maximize productivity, it is my opinion that landowner and tenant must find some equitable arrangement where they both share input costs that impact productivity.

Helpful Link:  http://agecon.uwyo.edu/RiskMgt/legalrisk/CSorCSCASHRENTALArrangforFarmPDF.PDF

 

 

 

By Jeffrey Hignight, Farm Manager and Associate Broker at Glaub Farm Management.  Serving Landowners in Arkansas, Mississippi, Missouri, and Tennessee.

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