The buildout from the gasfields of northern and southwestern Pennsylvania will have a direct impact on many farmed acres across the state. Considering these simple steps for determining crop damage payments is a good place to start negotiations.
During natural gas pipeline easement negotiations, agricultural landowners should be asking for compensation for crops damaged during pipeline construction. This is a quick tutorial for calculating a damage payment. The basic mathematical formula is as follows:
Lost Yield x Commodity Price x Disturbed Acres = Potential Damage Payment
We use the term ‘potential damage payment’ since the final payment will be determined via negotiation with the company land agent or ‘landman’. Some land agents will accept any reasonable crop damage estimate; others may use your damage estimate as a starting point for negotiation. Whatever the agreed-upon damage payment is, make sure the amount is provided to you in writing prior to signing the agreement.
Determining Lost Yield
Lost yield - or expected crop yield – is ideally calculated from your farm records. Since you are trying to determine an expected yield, it is reasonable to use a recent running average for the farm or the impacted field; excluding atypical years such as drought or flood. If you’re struggling to determine a reasonable expected crop yield, your local Extension educator may be able to provide some guidance.
During pipeline negotiations, it is common to assume full crop loss the year of construction and then some loss (yield drag) over the right-of-way for several years after the site is restored due to soil disturbance and compaction. Many people have used a ‘100%-50%-25% formula’ as described below. For our example, we have a corn field with a documented five year average yield of 175 bu/acre and we
expect a full loss during the year of construction, 50% loss the second year, 25% loss the third year and no loss accounted for in years four and beyond. So our total yield lost is:
Total lost yield: 175 bu + 87.5 bu + 43.8 bu = 306.3 bu/acre
Picking a Commodity Price
Commodity prices are, of course, quite variable over time. It is up to the landowner to pick a realistic commodity price as a starting point for the negotiation with the landman. You could choose to use the current market price for your crop, a futures price for the anticipated date of pipeline construction, an average historical price, or some combination of these prices. Regardless of which price you use, be sure you can provide justification for the price if requested. For our example we will use a current December 2016 futures price of $4.08 per bu.