March 3, 2000 | By: Mark Eclov
LEXINGTON, KY.

Cross-county leasing and large quota cuts have focused attention on leasing arrangements for the 2000 tobacco crop. Questions like "What can I afford to pay?" and "What's a fair lease?" are foremost on the minds of many Kentucky tobacco growers and quota holders.

Ag economists at the University of Kentucky College of Agriculture have developed a budgeting tool that can help growers and landowners evaluate various leasing alternatives.

"The Tobacco Budgeting Comparison program is a computerized spread sheet that presents side-by-side budgets for four production alternatives that include owned quota, leased quota, grower share, and landowner share," said Steve Issacs, farm management specialist in the UK College of Agriculture. "Users can vary prices, yields, and input costs to determine the economic effects of different scenarios."

With a cash lease, the grower pays the quota owner an annual payment to lease the quota owners' pounds to their farm. Recent state average lease prices of 25 to 40 cents is expected to be surpassed in 2000.

In share lease arrangements, growers often produce the tobacco on the quota owners' farm with the landowner furnishing part of the inputs in addition to the land and barns. Growers and landowners split the returns, often 50/50, although other splits are quite common. Share arrangements vary considerably in terms and the contributions of each party.

"An equitable share lease has each party receiving compensation in proportion to the value of their contributions," said Issacs. The best way to assure equity is to list the inputs provided by each party (the grower and the landowner), place a fair value on each input, total the contributions, and split the proceeds on the basis of each person's contribution.

"Share leases can be complex and some inputs like location or soil quality are difficult to value," said Issacs. "Remember that a fair lease arrangement is one in which both parties are happy."

Cash leases are a little more straight-forward. The grower usually is paying a flat rate per pound of quota. Supply and demand conditions set the quota price. Quota cuts have put substantial upward pressure on quota lease rates. The major task for growers is to carefully budget the prevailing quota rates into an enterprise budget to determine profit potential.

Yield variability can tremendously influence the outcome of lease arrangements. Users can run several scenarios at different yield levels to get an idea of the risk for each party in a lease.

The computerized tool is available in all Kentucky county Extension offices and can also be downloaded off the UK Agricultural Economics web page at www.uky.edu/ag/agecon.

Contact: 

Steve Issacs 606-257-7255