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Leasing Pecans

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Posted Apr. 30, 1999

When I was growing up on a diversified farm in Southern Oklahoma we had custom harvesters come in and pick up our pecan crop. People would show up with burlap bags or paper feed sacks and want to pick up "on the halves." In fact, that is how my sisters and I made our Christmas money. Then one year my uncle bought one of Basil Savages' first shakers and we found ourselves dragging tarps from tree to tree. From that point on, gathering the pecan crop (along with everything else in the world) got more and more mechanized. Picking up pecans by hand no longer is economically feasible, but neither is owning pecan equipment unless you own a sizable grove.

According to extension pecan specialists at Texas A&M1, a producer needs a minimum of about 100 acres of native pecans or 40 acres of cultivars to justify the basic equipment necessary for orchard management and harvest. Equipment cost may range from $40,000 to $90,000 depending on type and brand of equipment, and whether it is new or used. These kinds of numbers have kept a lot of landowners from taking advantage of an existing crop. On the other hand, some landowners have enough trees to make a profitable enterprise but lack the necessary time, expertise or inclination to pursue pecan production. Whatever the case may be, there are a lot of acres of pecans that go unmanaged and a lot of farmers that are unable to grow in their pecan business because of expensive or unavailable land. It sounds like these two need to get together.

Leasing of pecan trees may be an option that would well serve both parties. Of course, this is not a new idea, but it is one that may be difficult to implement. There are so many variables that it is difficult to make a good, blanket recommendation. Nevertheless, I will attempt to set out some considerations for crafting an individualized lease.

First, let us assume that there are unmanaged pecan trees available in your area. How much production potential do they have? Is the orchard or grove ready for production or does it need thinning, clearing, leveling, etc.? Will the landowner share expenses? Will the lease include the whole farm or only the trees, while the landowner retains grazing rights? If so, who fertilizes? What is the duration of the lease? When will the lease commence and payment be made? What method of payment is both fair and feasible? Let's address these questions one at a time.

What is the production potential of the trees in question? This determines how much can be invested, if any at all. The trees may be on thin, droughty soil or be overcrowded, limiting production. Genetic differences in trees results in wide variation in nut size and quality. For example, we have one river bottom on our farm where the nuts average about 75-80 per pound and grade about 44-46 percent kernel. In another field the nuts are a little bigger than a marble (about 140-150 per pound) and the average grade is about 38-39 percent kernel. Undesirable varieties can be a problem with some orchards. We lease a farm with a 20-acre orchard but we don't spend any money managing it because the varieties consist of Western, Burkett, and Halbert. We are too far east for those varieties to do well without a very high level of management. This problem is compounded by the fact that the orchard is overcrowded and our landlord is not willing to pay for needed thinning.

This leads into the next question: Is the orchard ready for production? This question is closely tied to the first one. A grove that has never been cleared, has grown up in brush or has become badly overcrowded might have a high production potential if cleared, but won't produce much initially. It might be worthwhile to clear if the landlord is willing to pay for the clearing or is willing to compensate the operator by using the cost in lieu of rent for a specified number of years. This would have to be negotiated based on how much was spent and how long the trees would likely take to come into production. For example, an overcrowded orchard will probably begin to increase its production the first year after thinning, whereas a grove cleared from dense woods might take several years to reach significant production. In some cases, the operator could pay for the clean up if he has a long enough lease to recoup his expenditure.

Will the lease include the orchard floor or the trees only? It is realistic to lease the trees only, but keep a few things in mind. If the trees are fertilized the grass is also, so the cost should be split between the enterprises. In addition, if the landowner is grazing animals under the trees he must understand that the vegetation needs to be kept short for maximum pecan production and must be short for mechanical harvest. Grazing can eliminate some mowings, but can cause compaction and can cause harvest losses if there are a lot of muddy hoof tracks. Another thing to keep in mind is spraying. Many chemicals have grazing restrictions for livestock under sprayed trees. Finally, if the owner does graze livestock they need to be removed from the pasture no later than October 1 so that manure has time to dry and not contaminate the nuts. This also prevents animals from eating early ripening pecans that drop.

What will the length and timing of the lease be? While an annual lease might be preferred in certain cases (questionable ability or reliability of operator), a longer term lease is usually desirable. A longer term (three to five years) offers the operator the incentive to invest in management practices that require a longer payback, such as pruning, leveling, fertilizing, liming, thinning or even fencing. The lease should run from March 1 to March 1 of the next year. This allows the operator to manage an entire crop year rather than a calendar year. Some suggest that waiting until after pollination (May) to determine the crop size is a good time to initiate, but this misses the best opportunity to fertilize and apply zinc or control phylloxera that will enhance production in subsequent years. Lease payment date can vary as long as the operator is given reasonable time to harvest and market the crop, and the timing is spelled out in the lease so that each party has the same expectations.

There are basically two methods for leasing: cash rent and crop share. Cash rent is seldom equitable in pecan production because of the risk involved. In most cases, crop share is the most equitable method of payment. This spreads the risk to both parties and adds to the attractiveness of a long term lease to a capable operator. The bottom line is: What rate is fair? In talking with a number of producers and reading various materials about leasing, I have found owner's share to range from 10-50%. With an owner's share of 50%, an operator can only afford to harvest; no other management inputs can be made. Determining what is reasonable is up to the individuals involved. If I am renting, I like the 10% rate, and if I am a landowner I might ask for as much as 25%. When you consider the time and investment that a good operator will make and the improved yields from good management, an operator needs to keep 80% to 85% to remain profitable.

You'll have to do your own math but remember that profit comes off of the top, after expenses. For example, if the landowner keeps 25% and the operator's return above costs is 25%, then the operator makes no profit. This is why knowing the production and quality potential is so important. Since investment is made before anyone can predict price, many leases make provisions for low price risk, such as "The operator will receive 80% or $0.30 per pound, whichever is greater." The $0.30 would be adjustable to the operator's breakeven price and would be a fair way to cover his production risk in the case of a down market.

Whatever agreement you work out, make sure you both spell out your expectations in writing. Management expectations will include some or all of the following: mowing, spraying, fertilizing, insect scouting, limb removal, wildlife control (especially birds and squirrels, but turkeys, hogs or others may cause problems). An owner's expectations might include: operations will be carried out in a timely fashion, gates will be closed, forward notice will be given to allow moving of livestock, etc. An operator's expectations might include: access to property (keys), cooperation in moving livestock in a timely manner, access to water source for spraying, etc. Try to be far-sighted and address potential problems before they arise. A permanent record of lease conditions is helpful because over the years situations change and memories fail. A written lease can settle disputes about who said what and who provides what. Sometimes it might be the tool that helps friends remain friends.

For many agriculture producers today expansion is necessary for survival. Leasing of trees is one way to expand without a large capital expense.

1McEachern, G. R. and L. Stein. 1993. TAEX Hort Handbook.