If you ask a farmer, agricultural economist, ag banker or ag real estate agent about Upper Midwest farmland rental rates, the response probably will include two words:
By all accounts, poor crop prices and marginal farm profitability are pushing down what farmers will pay to rent farmland. As a result, most farmland rental rates negotiated this winter "are flat or going down" from what they had been, says Noah Hultgren, a Willmar, Minn., farmer and real estate agent.
How much rates fall - and even if they fall - will vary across the region and even from community to community, says Andrew Swenson, veteran North Dakota State University Extension farm management specialist.
But one thing holds true just about everywhere. "They're not going up," he says.
They didn't go up in 2017 either. Average Upper Midwest cropland rental rates fell, depending on the state, about 2.5 percent to 4.5 percent from 2016 to 2017, according to statistics from the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture.
Note those averages. They mask major variations from area to area - just as average monthly temperature can hide major differences in daily temperatures during that month.
Many 2018 rates are still being negotiated, so it's too early to predict similar average declines from 2017 to 2018, ag officials say.
But this much is certain:
Landlords and their tenants across the Upper Midwest this winter are negotiating new farmland rental rate agreements to replace ones that expired at the end of 2017. The process can be one of the toughest jobs in modern agriculture, with landlords and tenants often holding sharply differing views on what's fair and reasonable.
What they ultimately agree on will be influenced by these factors:
• Were 2017 yields on a given field good, average or devastated by drought? Much of Montana, North Dakota and South Dakota suffered from severe drought last year, while parts of the region enjoyed good or even outstanding growing conditions.
• What crops are grown in an area? Prices of a few crops, including soybeans and lentils, are relatively attractive, while prices of many others, particularly corn, is poor.
• Have property taxes risen in a given area? If so, how much? A landlord paying sharply higher property taxes often is less inclined to accept lower rental rates.
• Did the expiring agreement contain a "high-end" rental rate, or one paid by an aggressive farmer hoping for strong crop prices? Such rates are most likely to decline, often substantially.
• When was the now-expired rental rate agreement originally negotiated? Rates generally have been falling for several years, so rates in a 3- or 4-year-old agreement might be more likely to decline now than rates in a 1- to 2-year-old agreement.
• How productive is the farmland? As Nate Franzen, president of the Agri-Business Division of First Dakota National Bank in Yankton, S.D., notes, rental rates for highly productive farmland, or land with a proven track record of consistently good yields, typically hold up better than rates for poorer farmland.
• Will interest rates continue to rise? And if so, how much? Higher interest rates would push up farmers' expenses, further limiting what they're willing and able to pay to rent land. In past years, low interest rates have helped to keep land rents steady, says Terri Jensen, an Accredited Land Consultant who owns and operates MN Land Real Estate & Auction in Northfield, Minn., and the 2015 national president of the Realtors Land Institute, a Chicago-based professional group.
Setting the stage
Negotiations this winter are based against a 10-year backdrop that began with record ag prosperity and ended with widespread drought, rising expenses and declining farm income.
Upper Midwest farmers generally enjoyed strong crop prices and robust profits during the ag boom of 2008 to 2013. That encouraged landlords to ask for higher rental rates and allowed farmers to pay more, especially in areas where corn - which provided particularly strong returns - was common.
For example, eastern North Dakota's Cass County, a major corn producer, saw its average per-acre rental rate for nonirrigated cropland roughly double from 2008-15, rising from $67.50 to $125.80. (It dropped to $120.50 in 2017.)
Rental-rate increases generally were more modest in areas, particularly Montana, western South Dakota and western North Dakota, where corn isn't common.
But rates across the region have been falling in recent years, reflecting multiple years of poor crop prices and weak farm profitability. The tough times in U.S. ag will continue, and even worsen in 2018, according to the USDA's Economic Research Service.
The ERS projects that rising farm expenses and declining farm receipts will push down U.S. 2018 net farm income to $59.5 billion, 6.7 percent less than 2017 and the least since 2006.
Changes in rental rates in 2018 reflect what happened in the past two to four years, as well as 2017.
One-year rental agreements are increasingly common, but many agreements are for two, three or even four years. As a result, rental rates are said to be "sticky," which means they were slow to rise during the ag boom and have been slow to drop during the ongoing tough stretch.
That's the case in Montana, says Kate Binzen Fuller, assistant professor and extension specialist with Montana State University.
"Yes, rates have been pretty sticky here, both currently and historically," she says.
Per-acre cropland rental rates in the state from 2012 to 2017 fluctuated between $29.50 and $33, standing at $31.50 in 2017, according to USDA statistics.
Fuller says she's been asked a number of times why rates haven't declined more in the past few years.
"Land rental rates are generally sticky because of the value of the land," she says. "In general, I think the fact that rates here haven't declined much is indicative of hope for the ag industry - people have positive expectations for future returns."
Other factors could be at work, too, she says.
"Ag land may have other desirable attributes such as recreation value, scenic beauty or development potential that may be propping values up," Fuller says.
Cash rent, the fixed amount of money per acre that a landlord receives regardless of crop prices and yields, dominates Upper Midwest agriculture. It's straightforward, easy to implement and provides certainty to both landlord and tenant.
But cash rent isn't the only option.
Crop shares gives the landlord a portion of the crop. That benefits the landlord when times are good financially and hurts the landlord in bad years. For farmers, crop shares reduce both risk and potential reward. Once popular, crop shares are used rarely today, reflecting difficulty in deciding how much the landlord should receive.
Flexible rents resemble both fixed rent and crop shares. Flexible rates typically provide a base (fixed) payment, plus a potential additional payment based on yields or prices or a combination of the two. Like crop shares, flexible rates spread the pain in tough years and share the gain in good ones - which is why ag officials say they warrant careful consideration.
But flexible rents don't appeal to landowners who want the certainty of a fixed payment or ones who live far away and have little, if any, personal experience with farming, ag officials say.
Flexible rents also lack appeal to savvy farmers whose marketing decisions reflect their production costs, says Franzen, the South Dakota banker.
Such farmers want an accurate estimate of what it will cost to produce their crop so they can try to lock in sale prices above that amount to give themselves a profit. Flexible rents could cause that estimate to fluctuate, hindering their marketing plan, he says.
Like others in area ag, Franzen says landlord-tenant negotiations can be difficult, especially when tenants want to pay less than they had been.
But farmers who were open and honest with their landlords during good economic times usually have an easier time persuading landlords that lower rental rates are justified now, he says.
"When there's a history of transparency, there will be more success in reducing rates," Franzen says.
Ag officials recommend that farmers and landlords collect reliable, objective information about rental rates in their area. They also urge renters and landowners to consider the other side's viewpoint and to remember that both sides are important and need to be reflected in the final agreement.