On the interaction of lease length and machinery replacement decisions

This study investigates the relationship between lease length, and the landlord and the tenant decisions. Specifically this study determines: (1) the optimal machinery replacement timing and size under the various lengths of share contracts and (2) whether long-term contracts are superior to a sequence of year-to-year contracts for landlords and tenants. This study employs a whole farm approach in modelling a part-owner operator\u27s machinery replacement decisions. Stochastic dynamic programming is used as a solution method. This study finds that a long-term contract does not affect the tenant\u27s machinery replacement decisions at all under the current level of rental security measured by the probability of getting a share lease for the text period. Even when the tenant\u27s perception of rental security is low, the landlord does not have any incentive to provide a contract longer than 2 years. When the part-owner operator rents only a small portion of total acreage, the benefit from a longer lease becomes ever smaller than when a large portion of total acreage is rented. Finally, high interest rates tend to delay machinery replacement