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Published October 29, 2012, 09:49 AM

What's the fair price for land rent?

The average farmland rental rate has risen 40 percent in roughly 30 two-year North Dakota farmland agreements renegotiated this fall by US Bank’s Farm Management Group.

By: Jonathan Knutson, Agweek

One of the toughest jobs in farming could be even trickier than usual this winter.

Many farmland rental agreements expire at year’s end, and area farmers and landlords are working to reach new deals. The task is complicated by two conflicting trends:

•Crop prices are high, and many farmers will enjoy strong profits this year. Given that, many landlords want higher rents for their property.

•Drought grips the region and 2013 crop yields threaten to be very poor unless substantial precipitation falls by spring. Also, experts generally agree that crop prices likely will be lower next year. Given that, many farmers are reluctant to pay higher rents.

Reconciling the two trends and arriving at a mutually agreeable price won’t be easy, area agriculture officials say.

“It’s making a lot of people scratch their heads right now,” says Paul Craigmile, market president of agriculture and business banking for American Federal Bank in Hallock, Minn.

Nonetheless, some area farmersare paying more — a lot more — to rent land.

The average farmland rental rate has risen 40 percent in roughly 30 two-year North Dakota farmland agreements renegotiated this fall by US Bank’s Farm Management Group, says Charles Peterson, a Fargo, N.D.-based vice president for the organization.

As an example, farmland that rented for $50 per acre in 2011 and 2012 will rent for $70 per acre in 2013 and 2014.

The rates in some of the new leases are 20 to 30 percent higher than two years ago, while rates in other new leases have risen by as much as 70 percent, with the overall increase averaging 40 percent.

“The demand is out there,” says Peterson, who is active in the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers.

Farmland in the 30 leases stretches from southeast to southwest North Dakota, he says. US Bank’s Farm Management Group manages about 1 million acres of farmland, including roughly 200,000 acres in North Dakota and Minnesota.

Typically, rental rates in farmland agreements handled by farm management companies tend to be higher than rates in agreements negotiated directly by farmers and landlords, says Andrew Swenson, North Dakota State University Extension Service farm management specialist.

He says he’s heard anecdotal reports that rental rates are rising across the state, but has no reliable statistics.

Burton Pflueger, a South Dakota State University Extension specialist who tracks land prices and rental rates, says he doesn’t have any hard data on 2013 rental rates.

But like other extension specialists, he recommends that farmers and landlords look carefully at flexible rates.

“Flex rates are something you should consider,” he says.

So-called flexible rates allow farmers and landlords to share the gain in good years and the pain in bad years.

Farmers: be realistic

The farmland rental rates paid by some farmers don’t make economic sense, says Brad Thykeson, a Portland, N.D., farmer and president of the North Dakota Grain Growers Association.

Historically, some famers have overpaid for land. Those who do invariably “get their ears trimmed down the road,” he says.

Landlords, in trying to reach a fair rental agreement, need to keep in mind that crop prices could fall sharply and that drought threatens next year’s crop, Thykeson says.

Kurt Krueger, a Rothsay, Minn., farmer and immediate past president of the Minnesota Soybean Growers Association, says crop prices have declined already.

“There was a lot of talk about these high crop prices, but they’ve settled back down in the past month,” he says.

The failure by Congress to pass a new farm bill also needs to be considered in rental rate negotiations, he says.

Most farmers rely on federal crop insurance, so the lack of a new farm bill is troubling.

Landlords also need to realize that the cost of expenses such as fuel and fertilizer continue to rise, farmers say.

Craigmile says a number of his farming clients have found that costs involved with the 2012 crop were greater than they expected.

Impact of the drought?

The region’s drought almost certainly will affect rental rates negotiated this fall, but it’s difficult to estimate how much.

Peterson, with US Bank’s Farm Management Group in Fargo, N.D., says moisture conditions could improve substantially before the 2013 crop is planted.

He also notes that advances such as no-till farming and drought-resistant crop varieties reduce the damage from dry conditions.

Typically, rising land values indicate that rental rates will rise, too. So it’s worth noting that a recent survey by The Iowa Farm and Land Chapter #2 Realtors Land Institute found that land values continued to rise this summer in Iowa, even though the state was hammered by drought.

Statewide in Iowa, the average price of farmland rose 7.7 percent from March to September, the survey found. The upturn was attributed to a few factors, including strong commodity prices and unattractive returns in competing investments.

The increase would have been greater without drought, although it’s difficult to say how much, according to Kyle Hansen, president of the Iowa Chapter of the Realtors Land Institute and a real estate professional at Hertz Farm Management in Nevada, Iowa.

Early signs suggest farmland rental rates in Iowa will rise, too, he says.

Rental rates rising

Farmland rental rates have been rising for years.

In August, the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture, released these numbers:

•In North Dakota, the average rental rate for nonirrigated cropland in 2012 was $57 per acre, up from $51 in 2011.

•In Minnesota, the average rental rate for nonirrigated cropland in 2012 rose to $150 per acre, up from $135 a year earlier.

•In South Dakota, the average nonirrigated cash rental rate rose in 2012 to $93 per acre, up from $78 per acre in 2011.

•In Montana, the average rental rate for nonirrigated farmland in 2012 was $23 per acre, down from $23.50 in 2011. The average rental rate for nonirrigated farmland in the state, however, has risen from $20.50 per acre in 2008.

One of the biggest factors pushing up land values and rental rates in the Upper Midwest is the rising popularity of corn. The crop, which can be more profitable than crops such as wheat, is relatively uncommon in Montana.

Three things to keep in mind with land rent agreements and potential

increases:

•Rents being negotiated this fall typically involve expiring contracts that ranged from one to five years in length. Rates negotiated four or five years ago don’t reflect rising rates in the past few years and consequently have more “catching up” to do than rates negotiated in the past two or three years.

•Some landlords haven’t changed their rental rates in many years and in 2012 charged a rate far below the market price, Hansen says.

Landlords who have held rental rates steady for many years owe it to themselves to investigate rental rates in their county or area, he says.

n Many considerations besides economics factor into rental rates. For instance, a landlord might accept a lower rate from a farmer who treats the land well or provides a service such as keeping the landlord’s road open during a snowy winter.

How about flexible rents?

Area extension officials increasingly promote the value of flexible rents. They say such agreements are a useful way to manage risk.

George Haynes, an agricultural economist with the Montana State University Extension Service, says interest in flexible rates has been growing. But he’s uncertain how much of the interest will translate into action.

Here’s a hypothetical example of how flexible rent might work:

Say a landlord wants cash rent of $55 per acre. He or she would receive that amount regardless of yields and crop prices.

Instead, the landlord and farmer agree to a base rent of, say, $45 per acre with the landlord receiving an additional $20 per acre if yields and pricesreach pre-determined levels. This way, the landlord is guaranteed $45 per acre and could make $65 per acre in a good year.

In this example, the farmer helps himself by paying less rent if drought persists or crop prices decline or both occur. The landlord, in turn, makes less money if it’s a poor year.

Likewise, the farmer hurts himself by paying more rent if it’s a good year. The landlord, then, makes more money if the farmer does well.

But no matter what happens, the farmer and landlord share in both the risk and potential return going into the new crop year.

Getting it right

But flexible rents do have their drawbacks, farmers and ag officials say.

For instance, cash rents provide a certainty that can appeal to both farmers and landlords. Agreeing on the amount of the base payment and the method of calculating the bonus or additional payment also can be problematic.

Some farmers and landlords will want to stick with cash rents, while others will want to investigate flexible rents, Swenson says.

“One size doesn’t fit all,” he says, adding that the NDSU Extension Service plans to conduct workshops on farmland leasing arrangements later this year and early next year at locations around the state.

Pflueger, the SDSU Extension specialist, says farmers and landlords should take their time and do things right.

“Don’t rush. Make sure you get an agreement that’s fair to both sides,” he says.

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