Friday, July 3, 2015

Is Share Still Fair?

Mid January, 1996

In my area, much of the farm ground is rented on a 50/50 share basis.  Mutually satisfactory for a long time, it is slipping in popularity, with expansion-minded farmers willing to offer more and assertive owners asking more. To many farmers, this trend violates their sense of what is "right".

This sense of "rightness" has its roots in our cultural past. Share renting became popular in the late 1800's with the opening of the vast prairies of the Midwest. Railroads, given enormous tracts of land by the government in exchange for extending their lines through this new territory, sold to land speculators, as well as new immigrants and westward-migrating Americans.  The nature of the business of farming was radically different. Land was cheap, the labor requirement enormous, equipment rudimentary, and  purchased inputs unknown.

The system of share rent that arose handled these factors with efficiency.  Landowners were able to attract farmers to their ground, and farmers generated sufficient surplus, albeit by seemingly endless toil, to make this life comparably attractive. Operator labor was the only way a landowner could get any return on land and finding a tenant in labor-short areas was a serious problem. (Sounds almost too good to be true.) Even as late as the 1930's, Midwest farmland went unplanted for lack of a tenant. These conditions encouraged the standardization of share rent.

Shares had several attractive features. It was simple, with  minimal arithmetic. Even uneducated farmers could understand a "one-for-me-one-for-you" reckoning. It was outwardly egalitarian - treating landlord and tenant equally. This "one man, one share" aspect fit well with the ideas of democracy being enjoyed by the new farmers.

Group concerns were also satisfied, as everyone could expect the same "deal", regardless of status, or even ability. Community opinion was of paramount importance for economic reasons. With musclepower being the largest input, being part of the group meant your barn got raised and your crop harvested by group effort. There weren't many successful loners, unless they were wealthy enough to hire scarce labor.

Community approval could thus enforce the uniform application of rent terms to treat all members the same, preventing friction in a group that had to stay cohesive. Since all terms were standard, the only "negotiation" was the selection of the farmer, eliminating an opportunity for one party to be "taken". Equality became synonymous with fairness. The system worked well, but has generated tenant expectations of identical, benevolent treatment, reaching the point now where many tenants speak sincerely of landlord responsibility for tenant well-being (housing, improvements, reasonable profits, etc.) as an assumed social contract.  

Today landowners increasingly are seeking (and winning) concessions.  Fifty-fifty rent may have alterations for chemicals, taxes, custom work, lime, etc. Moreover, as land prices increase, the contribution of the landowner to the business increases. Simultaneously, as the efficiency of the tenant increases, his or her contribution (labor) on each acre actually decreases.  These mismatched trends are wrenching the original assumptions for 50/50. Community standards, meanwhile, mean less in an era of independent, county-spanning operations. 
Other factors enter the picture. Tenant assertions that shares promote greater stability offer little to satisfy owner desire for an attractive return. The expectation that risk should be shared no longer enjoys universal acceptance.  On the other hand, current federal estate tax treatment of family farms, specifically "special valuation", with the material participation requirement, acts as an anchor against the slow tide away from share rent.

Perhaps share rent will pass into history like dowries - an economic anachronism. Perhaps not.  Within families, or retired farmer-owners, where some purpose other than maximum economic return drives business arrangements, the risk-sharing attribute of shares is attractive. In families, share rent shelters young farmers, and is a subtle way of transferring income.  Likewise, within close communities or friends, it may remain the norm. The bottom line is that landowners now possess sufficient leverage to unilaterally specify rental conditions based on their goals.   

In practice, what we feel is "right" is often what is familiar and beneficial to us. Fairness, like beauty, is subjective. However, anything is "fair" if all parties willingly agree to it. Cash rent, custom farming, or hybrid rental arrangements can serve the needs of the participants well. For farmers who feel they are being unfairly forced away from a system they prefer, the solution is both simple and difficult: own the land.  

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