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Published June 03, 2013, 09:57 AM

2 contracts

An ag lender meeting in Moorhead May 29 addressed negotiating rents and deciding whether to put tile on rented ground.

By: Mikkel Pates, Agweek

MOORHEAD, Minn. — With land values increasing, more farmers are paying the expenses for tile-draining land that they rent, says Dwight Aakre, one of the speakers at the Northwest Minnesota Region Ag Lender’s Spring Update in Moorhead on May 29.

The practice is somewhat tricky to protect both parties in the transaction. Generally, the landowner pays for the tiling.

“In some cases, you have pretty aggressive renters, they want to tile a piece of ground but the owner isn’t interested,” he says. “Maybe they’re elderly, don’t want to spend the money, or don’t see the benefit. So the renter is looking at the possibility of spending the money for tiling.”

Aakre suggests a way for renters to pay for the tiling up-front, but be reimbursed gradually by having a lower rental figure than its new tiled value.

“Assuming a $700 an acre investment, at 5 percent (loan) interest, over 10 years, then that’s over $90 an acre per year,” he says. “If the land would normally rent for ‘X’ dollars because it’s tiled, now the rent should be $90 less (than X) until that $700 investment is recouped.”

In a hypothetical example, if a piece had been renting for the past three years at $130 an acre, the new rental rate for tiled land might jump up to $250 per acre. Then the $90 might be subtracted from the $250 per acre to have a new rental arrangement at $160.

The difficulty is in knowing the difference between tiled and untiled rental values. “There’s no good database,” for that problem, Aakre says. “It’s what the two parties can agree to.”

Aakre says there should be two contracts — one for the standard land rental agreement, and the other that specifies the payback for the investment in the tile. There needs to be a contingency if either party wants or needs to withdraw from the rental deal. The landowner by default owns the tile that the renter paid for.

“I wouldn’t say it’s real common, but we are seeing more of it than we ever saw before, and it’s a direct reflection on the current profitability in farming,” Aakre says. “If that changes, it will change as well.”

Despite a frenzy to tile farmland in the past three to five years, a relatively small percentage of the acreage in the Red River Valley region — maybe less than one in 10 acres — is tiled, Aakre says, although small areas have higher percentages.

Aakre talks about the obvious advantages of higher yields and quicker planting and harvesting as the prime reasons for tiling. The dryer fields reduce equipment wear and tear, cut power and fuel requirements, and can reduce plant diseases and soil compaction. Tiled land increases some costs (fertilizer, hauling, drying and storage) but those are “incidental,” Aakre says.

Tile lasts for 50 years or more, and yields continue to increase. Soybean yields can be expected to rise about a half-bushel per acre and corn yields have gone up two bushels. Tile is a depreciable asset.

The biggest question is whether increasing yields will justify tiling costs. He says those costs tend to be about $700 an acre. He uses an example where a quarter of land went from 120 bushels on pre-drained land to 132 bushels after tile drain was installed.

Soybean yields would go from 30 bushels an acre to 33 bushels post-drained in a corresponding example. Added net income per acre would be nearly $50 for corn and $30 for soybeans. He says the payback period for tiling land is “conservatively” 12 years (after tax), and some farmers have seen the investment pay for itself in as few as three to four years, depending on crops and market conditions.

Aakre says farmers should remember that in some ways, tiling is “redundant” to protections from Federal Crop Insurance. “Once your yield drops below your yield guarantee, your crop insurance pays for that loss,” he says.

“The loss down to that point, you’re getting the benefit (from tiling investment) but below that crop insurance would pay for it if you had a loss.”

Aakre says there is no crop insurance premium break for putting in tile. “Maybe down the road that could happen,” Aakre says.

Defend and grow land base

Bret Oelke, a University of Minnesota regional agricultural business management specialist based at Morris, Minn., and Elbow Lake, Minn., talked to ag lenders about how farmers defend and grow their land base in a period of volatile farm commodity prices and technological change.

Oelke says most farmers today have equipment that allows them to farm 5,000 acres, rather than the 1,200 acres from just a few years ago. Oelke and Aakre say farmers tend to have more equipment than they need to farm their land, but that in years such as 2013, when they have a small weather window to plant, or harvest, it can save them. Oelke says the Elbow Lake area planted all of its corn, soybeans, sugar beets and small grains in about in 10 days.

“In 10 days they put in an entire crop and the biggest of those guys with one set of (planting and tillage) equipment. That’s kind of the benchmark for our region,” he says.

The biggest buyers of farmland today are still farmers trying to expand.

Some farmers are increasing farm size to maintain or improve optimum production efficiency. Others are growing to accommodate family members, but some are simply doing it for greed, ego and risk-seeking. Others simply expand “because they can.”

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