Caution On Cash Rental Rates

Cash corn prices are currently at some of the highest prices ever, which is spurring some very rapid and dramatic increases in land values, and in annual cash rental rates. Cash corn prices in Southern Minnesota have risen from under $2/bu. in late September 2006, to over $3.50/bu. in mid-January 2007. Producers can forward price their 2007 corn at a new crop local price of $3.25/bu. or higher, which is the highest price in over a decade. Similarly, the cash price for soybeans in Southern Minnesota is currently above $6.75/bu., compared to under $5/bu. in late September 2006. Producers can currently forward price their 2007 soybean production at new crop local price above $6.50/bu. These higher commodity price levels for corn and soybean inventories, as well as price prospects for 2007, are starting to be reflected in higher land rental rates.

Some landlords in Southern Minnesota, but not all, have been asking for substantial increases in year-to-year land rental rates for the 2007 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, because they don’t want to lose the crop acres and may have already prepaid some of the crop expenses for seed, fertilizer and chemicals for the 2007 growing season. Similarly, landlords are 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.

Land rental increases of 10-25% or more for 2007, as compared to 2006, have been reported in some instances, but not in the majority of situations. Fortunately for farm operators, the annual land rent increases above 10% for 2007 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 2007 land rental rates of $5-10/acre. However, most landlords will be closely monitoring commodity prices and yields in 2007 to determine if further increases in land rental rates are justified for the 2008 crop year, and beyond.

Farm operators are encouraged to use caution when agreeing to large increases in 2007 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 2007 crop year, especially with corn production, if a producer utilizes forward pricing and a revenue assurance (RA) crop insurance policy to reduce the financial risk. However, what will the future profitability be on the high-rent crop acres be in 2008 and beyond, if commodity prices are lower, and landlords are not willing to lower cash rental rates ?

A better 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 5-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 re-negotiated, and a new flexible agreement starts. This makes it much easier for the farm operator to maintain consistent farm financial management in the farming operation.

Farm operators should make sure that land rental agreements with landlords are finalized for 2007 before paying for 2007 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 2007 land rental acres to another farm operator, and the original farm operator has prepaid crop inputs on those acres, and has contracted grain that now must be purchased to fulfill those grain contracts. (This situation actually occurred recently for a farm operator in southern Minnesota.)

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’s good to discuss these items with a landlord and include them in a written lease agreement.

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

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN.
You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.