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Farmland rental rates not reflecting lower crop prices

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The very strong corn and soybean prices in the past couple of years, and the resulting increases in crop income per acre, have lead to significant increases in cash rental rates on farmland in recent years. Many crop producers are now concerned that the lower projected crop prices for 2014, and reduced estimates for gross income per acre, may not be high enough to justify the higher cash rental rates that are currently being charged, or are being proposed for the 2014. There has been no indication of any reduction in land rental rates in south-central Minnesota for 2014, as compared to current levels.

Some landlords in southern Minnesota, but not all, asked for substantial increases in year-to-year land rental rates for both the 2012 and 2013 growing seasons, and are now considering holding those rates steady for the 2014 crop year, and in some cases increasing those rental rates even more. Also, some larger producers have been going into new areas in recent years, and offering much higher land rental rates than existing cash rental rates, based on the higher grain prices and gross income per acre.

Farm operators are put in a difficult position when landlords demand higher cash rental rates than can be justified by projected returns, because they do not want to lose the crop acres. They may have also already prepaid some of the crop expenses for seed, fertilizer and chemicals for the 2014 growing season. Total cash expenses for corn production are expected to decrease slightly for 2014, due to a decrease in expected fertilizer costs for the coming year. Crop production expenses have risen about 20-25% from 2011 to 2013, primarily due to increases in seed and fertilizer costs.

Landlords are also put in a difficult position when another farm operator offers them a substantial increase in annual land rental rates, as compared to the current cash rental payment they are receiving from a long-term farm operator. In most cases, this requires some negotiation between a landlord and a farm operator to arrive at an equitable rental rate that is acceptable to both parties.

Local cash prices for fall 2014 are currently projected to be near $4.20 per bushel for corn and below $11 for soybeans. At normal yields and cost of production in south-central Minnesota, with an average land rental rate of $250 per acre, many producers will be looking at breakeven market prices for 2014 of near $4.50 per bushel for corn and $11 for soybeans, excluding any return to labor and management. If the land rental rate is increased to $300 per acre, the breakeven market prices under average costs of production increase to near $5 for corn and $12 for soybeans, excluding any return to labor and management. If land rental rates are too high for 2014, it may be very difficult for some farm operators to reach breakeven levels next year, under normal growing conditions and average crop yields. Of course, there are many variations in average farm expenses and expected crop yields from farm-to-farm.

We are still waiting for a new farm bill to be passed by Congress. Once a new farm bill is in place, it is likely that the guaranteed direct payments that farm operators have received for the past couple of decades will likely be eliminated. The direct payments amount to an average of about $25 per acre for corn and soybean producers in most south-central Minnesota counties. Most landlords have factored the direct payment amount into the land rental rates that have been charged in recent years; however, there will not likely be a reduction in land rental rates when direct payments are eliminated.

An alternative to the proposed high cash rental rates for 2014, or potentially even higher rental rates in the future, may be for producers and landlords to consider a flexible cash leaserental agreement, which allows the final cash rental rate to vary as crop yields and market prices vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on how the flexible lease is set up. There are many variations to setting up a flexible lease agreement between a landlord and farm operator. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate.

Utilizing flexible cash leaseagreements between farm operators and landlords can be a good management strategy as an alternative to extremely high straight cash rental rates; however, there are some details to pay attention to. It is extremely important that all aspects of a flexible land rental lease agreement be spelled out in detail in a written rental contract, which is signed by all parties. Successful flexible cash leaseagreements, as well as normal land rental agreements, have always involved cooperation, trust, and good communication between the farm operator and the landlord. To receive more detailed information on flexible cash leases, contact Kent Thiesse at (507) 726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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