Use Caution with Cash Rental Rates for 2011

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Table of Contents:

  • Land rental rate increases of 5-15% for 2011, as compared to 2010, have been reported in many instances across the Upper Midwest
  • Farm operators are encouraged to use caution when agreeing to large increases in 2011 cash rental rates

Cash corn and soybean prices rose sharply earlier this fall, which is spurring some very rapid and dramatic increases in annual cash rental rates. Cash corn prices in southern Minnesota rose above $5.20/bu., and cash soybean prices were near $12.50 in early November. However, local corn prices have dropped back below $5 in late November, and cash soybean prices are back below $12. Producers can forward price their 2011 corn at a new-crop local price near $4.50, and 2011 soybeans near $10.70, which are somewhat lower than the current cash grain prices. These higher commodity price levels for 2010 corn and soybeans, as well as very good price prospects for the 2011 crop year, are definitely being reflected in higher land rental rates across the Midwest.

Some landlords in southern Minnesota have been asking for substantial increases in year-to-year land rental rates for the 2011 growing season. Also, some larger producers have been going into new areas and offering much higher land rental rates than existing cash rental rates. Farm operators are put in a difficult position when landlords demand much higher cash rents for 2011, because they do not want to lose the crop acres, and may have already prepaid some of the crop expenses for seed, fertilizer and chemicals for the 2011 growing season. Total cash expenses for corn production in 2011 are expected to rise about 10-15%, compared to the current year, primarily due to a significant increase in 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 their current cash rental payment they are receiving from a long-term farm operator.

Land rental rate increases of 5-15% for 2011, as compared to 2010, have been reported in many instances across the Upper Midwest; however, there are reported increases of 20-30% or more being asked by some landlords, or offered by some farm operators. Fortunately for farm operators, the annual land rent increases above 20% for 2011 have been more the exception than the rule. Most landlords realize that the current spike in commodity prices may be short-lived, and have opted for more modest increases in 2011 land rental rates in the range of $10-30/acre. However, most landlords will be closely monitoring commodity prices and yields in 2011 to determine if further increases in land rental rates are justified for the 2012 crop year.

Farm operators are encouraged to use caution when agreeing to large increases in 2011 cash rental rates, or bidding high cash rental rates on new cropland that becomes available. Some things to consider:

It may be possible to cash flow and show a profit on higher land rental rates for the 2011 crop year, if a producer uses forward pricing and a revenue assurance (RA) crop insurance policy to reduce the financial risk. However, what will be the future profitability be on the high rent crop acres in 2012, 2013 and beyond, if commodity prices are lower, and landlords are not willing to lower cash rental rates?

Another alternative may be for farm operators to enter into a flexible cash rent agreement with a landlord, which sets a reasonable base rental rate that is based on five-year average crop yields and prices, but has provisions to increase the final annual rental rate in the event of exceptional crop yields and/or much higher than anticipated crop prices during that crop year. These final cash rent adjustments are made after the growing season, are paid on the final rent payment for the year, and are for that year only. The following year the base rental rate either stays the same or is renegotiated and a new flexible agreement starts.

Farm operators should make sure that land rental agreements with landlords are finalized for 2011 before paying for 2011 crop input costs on those rented acres, or before forward contracting a portion of the anticipated crop production at a market price for future delivery. It could be an expensive mistake if the landlord suddenly chooses to cash rent those anticipated 2011 land rental acres to another farm operator, and the original farm operator has prepaid crop inputs on those acres and has contracted grain from those anticipated acres that now must be purchased to fulfill those grain contracts.

Farm operators should make sure that there is a written contract with all landlords that lists the amount of cash rent, payment dates, any flexible payment stipulations and specifies a notification date if the land will be rented to another party (to avoid the earlier situation). If livestock manure will be used for fertilizer, extra tillage will be performed for corn-on-corn acres or any other special crop production circumstances, it is good to discuss these items with a landlord and include them in a written lease agreement.

Good communications between a farm operator and landlords is the main key to avoid problems and arrive at workable solutions on land rental issues.

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