Use Caution On Cash Rental Rates

Cash corn and soybean prices remained at fairly high levels during 2009, with local cash grain prices during the year in southern Minnesota near $4/bu. for corn, and around $10/bu. for soybeans. The higher grain prices in the past couple of years have lead to some very rapid and dramatic increases in land values and in annual cash rental rates. Cash corn prices in southern Minnesota have now dropped below $3.25, and cash soybean prices have dropped below $9 in recent weeks. Current cash forward price opportunities for 2010 at local grain elevators are near $3.40/bu. for corn, and near $8.50/bu. for soybeans. Most of the significant increases in 2009 cash rental rates were based on the corn and soybean prices that existed in the 2008 and 2009, and not on grain market projections for 2010.

Many landlords in southern Minnesota asked for substantial increases in year-to-year land rental rates for the 2008 growing season, with a lot of them asking for additional rental rate increases for 2009. Some are seeking further increases for the 2010 crop year. Also, some larger producers went into new areas in 2008 and 2009 and offered much higher land rental rates than existing cash rental rates, with some negotiating multi-year rental contracts for 2009 and beyond. Farm operators are put in a difficult position when landlords demand higher cash rents, because they do not want to lose the crop acres and they may have already prepaid some of the crop expenses for seed, fertilizer and chemicals for the upcoming growing season. Total cash expenses for crop production rose over 30% in 2009, and have doubled in the past three years. 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 they are receiving from a long-term farm operator.

Farm operators are encouraged to use caution when agreeing to any increases in 2010 cash rental rates, or bidding high cash rental rates on new cropland that becomes available. Some things to consider:

• It may have been possible to cash flow and show a profit on higher land rental rates for the 2009 crop year if a producer has used forward pricing and a revenue assurance (RA) crop insurance policy to reduce the financial risk. Profitability for 2010 corn and soybean production will be much more difficult, given the lower grain market prices and higher input costs. Future profitability on the high-rent crop acres in 2011, 2012 and beyond may be even more difficult if commodity prices are low and landlords are not willing to lower cash rental rates.
• Farm operators should make sure that land rental agreements with landlords are finalized for 2010 before paying for 2010 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 2010 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.
• 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 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 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 communication between a farm operator and landlord is the main key to avoid problems and arrive at workable solutions on land rental issues.

Good News On Flexible Leases
Based on a decision by USDA before the 2009 crop year, nearly all flexible cash leases for land rental contracts are now be considered cash leases by FSA offices for farm program payment determination for the 2009-2012 crop years. The revised regulations state that any rental contract with a guarantee plus a bonus will be considered a cash lease, regardless of how that bonus is set-up or structured. Previously, FSA considered any flexible cash lease that was based on actual farm yields, prices or revenues to be a share rent lease, which meant that the landlord had to receive a portion of all farm program payments. This requirement was restricting the use of flexible leases in many situations. County FSA offices will still review land rental contracts, and will gather land rental information.

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.