Rental rates look 'steady' in 2014Lower crop prices expected to end long trend of rising farmland rates.
By: Jonathan Knutson, Agweek
After years of big annual increases, farmland rental rates appear to be stabilizing.
Farmers and landlords across the Upper Midwest are just beginning to renegotiate farmland rental agreements that expired after the 2013 growing season. So a full understanding of rental rate trends isn’t possible until spring, when renegotiations are completed.
Signals so far, however, indicate that lower crop prices have ended the multi-year run of rising rental rates.
“It looks like they’re staying steady,” says Kent Thiesse, a former University of Minnesota Extension farm educator and now farm management analyst and vice president with MinnStar Bank in Lake Crystal, Minn.
John Botsford, an independent farm management consultant based in Grand Forks, N.D., has the same assessment.
“It’s fairly steady, I’d say,” says Botsford, who leads Bremer Bank’s Farm Management Division. “There’s still plenty of demand for leased land, although the drop in commodity prices is giving pause to some people.”
His group manages farm property from southern Minnesota through North Dakota and South Dakota into northeast Montana.
Other experts who talked with Agweek also use “steady” or “stable” to describe their outlook for rental rates in 2014. Though some old, out-of-date rates are expected to rise, nobody expects the explosive, widespread increases so common in recent years.
In North Dakota’s McIntosh County, for instance, average farmland rental rates shot from $33.80 in 2008 to $66.40 in 2013, a 90 percent jump, says Mark Schaunaman, senior vice president of McIntosh County Bank.
The bank has locations in Ashley, N.D., and Zeeland, N.D., and serves customers in both North Dakota and South Dakota.
“I wouldn’t expect any increase from the 2013 rates. Commodity prices have dropped pretty dramatically,” Schaunaman says.
• Some expiring one-year leases, negotiated a year ago at very high prices by farmers aggressively seeking to expand, could be renegotiated at lower rates.
• A major change, either up or down, in commodity prices this winter would affect still-to-be-decided rental rates.
Crop prices already have fallen sharply. Lower prices, of course, affect how much money farmers make and how much they’ll pay to rent land.
The big drop in corn prices is particularly important. Corn can be more profitable to raise than other crops, and attractive corn prices helped push up rental rates in recent years.
The cash price of corn at area grain elevators surveyed weekly by Agweek is about $3.80 per bushel, down from about $6.65 a year ago. New-crop corn prices also have fallen sharply, to $4 per bushel and less.
What’s more, experts say, lower corn prices reduce coverage levels in crop insurance revenue policies, giving farmers a smaller safety net.
But experts don’t expect rental rates, on balance, to decline, either.
“I don’t see them dropping,” says Andy Swenson, North Dakota State University Extension Service farm management specialist.
Though crop prices have plunged in the past year, they remain relatively high by historical standards.
Five years ago, for instance, soybeans fetched an average of about $7 per bushel at area grain elevators surveyed weekly by Agweek. Now, even after a recent decline, soybeans average about $12 per bushel at the elevators.
Another consideration is that the costs of some expenses have dropped in the past year, which strengthens the outlook for potential profits in 2014, says Charles Peterson, Fargo, N.D.-based vice president for U.S. Bank’s Farm Management Group.
His organization manages about 450,000 acres of farmland, and he personally manages 45,000 acres of farmland in 26 counties in North Dakota and Minnesota.
The Farm Management Group runs crop budgets, which include the cost of expenses, for every farm it manages.
“We know the bottom line (financially) of each farm,” Peterson says. “We want what’s fair for the farmer, fair for the tenant.”
Some increases expected
Some rental rates could rise. Typically, rental agreements are negotiated for one, two, three or four years. Agreements negotiated two to four years ago reflect rates that were common then, but those contracts don’t take into account subsequent annual increases.
“There’ll be some catching up to do” in expiring multiyear contracts, Swenson says.
For instance, say a hypothetical four-year lease, at $50 per acre, expired this fall. Though that rate may have been realistic when it was negotiated in late 2009 or early 2010, it doesn’t reflect annual increases in 2010, 2011 and 2012. So, the contract could be for considerably more than $50 per acre after new negotiations this winter.
This summer, the U.S. Department of Agriculture’s National Agricultural Statistics Service released average statewide rental rates for nonirrigated farmland in 2013. The numbers are a blend of one-, two-, three-, four- and even five-year leases, many of which didn’t expire this fall:
• Minnesota: $177 per acre — up from an average of $135 per acre in 2011.
• South Dakota: $104 per acre — up from an average of $78 per acre in 2011.
• North Dakota: $64 per acre — up from an average of $51 per acre in 2011.
• Montana: $23.50 per acre — the same as in 2011 but up from $20.50 per acre in 2008.
By and large, leases have gotten shorter, experts say.
One- and two-year leases are more common, although some farmers and landlords prefer the greater certainty provided by leases for three years or more.
Swenson estimates leases average about two years in length in North Dakota, but says that number is a blend of one-, two-, three- and four-year leases.
Other factors at work
Many factors go into determining rental rates, experts say.
For instance, two or more farmers competing to rent the same piece of ground can push up the rental rate beyond what one farmer might pay for it.
Weather, and the effect it has on yields and farm profits in a given area, also affects rental rates.
For instance, northern Montana farmers generally have enjoyed better crops the past few years than their peers in the southern part of the state, which could influence rental rate negotiations, says Ryan McCormick, a Kremlin, Mont., farmer.
Changes in the price of a particular agricultural commodity can affect farmland rental rates more in some areas than in others.
For instance, sugar beets normally are one of the most profitable crops grown by farmers in the Red River Valley of eastern North Dakota and western Minnesota. Now, sugar prices have tumbled, which will affect farmland rental rates in the Red River Valley, ag officials say.
The lack of a new farm bill has little, if any, impact on rental rate negotiations. Farm bill proposals all retain the federal crop insurance program, which is the farmers’ priority, Thiesse says.
Nonfinancial considerations can influence rental rates, too, experts say.
For instance, a landlord might accept lower rates from a tenant who keeps the landlord’s road open during the winter.
Once, most famers in the region gave their landlords a share of the crop in exchange for the right to farm a field. Typically, landlords also shared in the expenses of putting in the crop. Share-cropping, as it’s often called, allows landlords and farmers to share in both good and bad economic conditions.
But share-cropping’s popularity has declined. That’s partly because technology is increasingly common in farming, and determining a tenant’s fair share of technology costs can be difficult.
Today, cash rent, or a fixed per-acre rental payment, is the norm. Cash rent is straightforward, and is especially popular when a farmer works with many landlords.
But experts recommend that farmers and landlords consider so-called flexible rents. Such arrangements, which come in many varieties, all provide more money to landlords in good years and less money to landlords in poor ones.
“Flexible rents can make a lot of sense, for both landlords and renters. But you need to do some research first,” Swenson says.
Some landlords, especially ones with little or no direct knowledge of modern agriculture, might consider hiring a professional farm manager to select the tenant and determine the rental rate, he says.
‘Coffee shop numbers’
Renegotiating farmland rental agreements can be one of the toughest, most sensitive jobs in production agriculture.
Both farmers and landlords need to use realistic numbers in their negotiations, experts say.
“Stay away from what you hear at the coffee shop. Those coffee shop numbers usually aren’t realistic,” Thiesse says.
Extension officials across the Upper Midwest often hold seminars on rental rate negotiations during the winter. The University of Minnesota Extension, for instance, recently announced a series of workshops on the topic.
Brian Eggebrecht, a Malta, Mont., farmer, stresses the importance of “good communication and reasonable expectations, on both sides” in farmland rental negotiations.
“There’s a lot of trust and back-and-forth that has go on between the famer and landlord,” he says.
Landlords also should consider whether a prospective tenant is concerned about the land’s long-term sustainability, he says.
“Cost isn’t the only factor. You want a good producer, doing the right things,” Eggebrecht says.
Landlords should ask themselves, “Will he (the producer) treat my land like he does his own? If he won’t, maybe he’s not the right person to rent my land,” Eggebrecht says.
Most important, he says, “The tenant and the landlord need to be realistic and to communicate. It’s the only way to come up with something fair to both sides.”