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Farmland rental rates holding steady — in places

Generalizing about Upper Midwest agriculture is risky. The area is so big, and weather, crops and yields vary so much throughout it, that what's occurring in some places may not be happening elsewhere.

But now, as many farmers and their landlords renegotiate rental agreements that expired after the 2018 crop season, this generalization about area farmland rental rates appears sound:

"In places with good (2018) yields they're steady. Where the yields were average or below-average, they're going a little lower," said Jack Davis, South Dakota State University Extension crops business management field specialist.

One example: Poor 2018 sugar beet yields in the Willmar, Minn., area are pushing down rental rates this winter, said Noah Hultgren, a Willmar farmer and real estate agent.

Davis' comment about South Dakota echoes what others in Upper Midwest agriculture are saying: Though poor commodity prices and marginal, even nonexistent profits are putting downward pressure on overall farmland rental rates, other factors — including land values, rising property taxes and strong 2018 yields in some areas — are mitigating the decline.

"We aren't really seeing downward pressure on rental rates at this point, although I think farmers around here are definitely feeling the pinch of current market conditions," said Kate Binzen Fuller, assistant professor and Extension specialist with Montana State University.

"Crop producers, while not overly pleased on the price side of things, had a good production year in 2018 compared to the record drought in 2017. Those (relatively) great production conditions for 2018 are likely going to continue propping up crop land rental rates, at least into the near future," she said.

Per-acre cropland rental rates from 2012 to 2017 fluctuated in Montana between $29.50 and $33, standing at $31.50 in 2017 and $32 in 2018 according to USDA statistics.

Statistics for the 2019 crop season will be available in late summer or early fall.

Other factors, particularly the relationship between the landlord and the farmer, also influence what happens with rental rates this year.

"Every situation is a little different," making broad, across-the-board conclusions difficult, said Jeff Mertz, a Hurdsfield, N.D., farmer and president of the North Dakota Grain Growers Association.

For example, some farmers grew multiple crops in 2018, with some of their crops enjoying good yields while others had average or even poor yields. Though that diversification is good, it complicates determining a farmers' overall yield, which in turn can complicate agreeing on a new rental rate, Mertz said.

But in general, farmers and landlords who have been open and transparent with each other in the past will have an easier time coming with a new agreement, he and others in agriculture say.

"That relationship is so important," said Mertz, who emphasized that he and his own landlords have a good one.

Typically, farmers and landlords agree on one, two-, three- or, in a few cases, even four-year leases. The one-year leases — and multi-year leases that expired after 2018 — will need to be renegotiated before the 2019 crop season. Many of the expired leases have been redone already, with most of the others renegotiated in the next few months, farmers and others say.

The backdrop

What's happening with farmland rental rates this winter is just the latest chapter in a decade of extreme fluctuations in farm profitability and major changes in what farmers pay to rent land.

The ag boom of 2008-13 brought record profits for many farmers, with U.S. farm income, a broad measure of profits, soaring to $120 billion in 2013. That encouraged landlords to ask for higher rents and allowed farmers to pay more. The higher rents were most pronounced in areas where corn, which often was particularly profitable, was common.

Cass County, in eastern North Dakota, is a good example. The county is the nation's leading producer of soybeans, and corn is a major crop, too. The average per-acre rental rate in Cass soared from $67.80 in 2008 to $125.80 in 2016, before slipping to $117 in 2017 and then inching up to $118.30 in 2018.

Keep in mind that overall farmland rental rates are said to be "sticky." They rise and fall relatively slowly from year to year, which reflects that multi-year leases aren't adjusted annually. So even though 2013 was the peak year for farm profit, the slowly rising average rental rates continued to go through 2015 and 2016.

In areas where corn isn't common, such as Montana, western North Dakota and western South Dakota, the rate increases were muted. Consequently, rental rates there went up slower, and usually are under less downward pressure now.

In some areas — further indication of the dangers in generalizing — farmland rental rates have risen since 2015, reflecting overall good yields since then and comparatively small annual increases from 2008 to 2015. For example, Nelson County, in north-central North Dakota, the average per-acre rental rate for nonirrigated farmland rose relatively modestly from $37.60 in 2008 to $55.80 in 2015, but then, instead of declining. continued to rise to $58.20 in 2018.

In any case, the end of the 2008-13 boom brought sharply lower farm profits, with projected 2018 U.S. farm profits falling to $65 billion, a 12-year low. With farmers in general making smaller profits, there's understandable and inevitable downward pressure on rental rates — and that's continuing this winter, farmers and others in ag say.

Indeed, rental rates overall have come down from their highs. In North Dakota, for example, the average per-acre farmland rental rate has fallen from a high of $69 in 2015 to $65 in 2018.

Land values, interest rates

Though rental rates rose sharply during the boom, land values — or the price that farmland fetches when it's sold — rose even more. That's affecting rental rates now.

There's an important, fundamental connection between farmland rental rates and land values, which is reflected in what's called the rent-to-value ratio said Bryon Parman, North Dakota State University agricultural finance specialist.

Two simple examples: farmland that rents for $50 an acre and sells for $1,000 an acre has a rent-to-value ratio of 5 percent, while farmland that rents for $80 an acre and sells for $2,000 an acre has a rent-to-value ratio of 4 percent. Put differently, the landowner is receiving a 5 percent return in the first example, a 4 percent return in the second.

Currently, the farmland rent-to-value ratio is 3 percent, which is relatively low, Parman said.

A further drop in rental rates, unless accompanied by a decline in land values, would lower the rent-to-value below 3 percent — and that's unlikely, Parman said.

But there's a wild card: rising interest rates.

In recent years, investments such as money market accounts and CDs have paid a very low interest rate, which has encouraged some investors to buy farmland instead. A hypothetical investment: An investor might be more willing to buy farmland with an anticipated 3 percent rent-to-value ratio rather than put the money in a CD paying, say, 1.5 percent.

But as interest rates rise, competing investments become more attractive and could lead to less investor interest in farmland, which in turn could cut first into farmland values and then into rental rates, Parman said.

"So interest rates will need to be watched, he said.

Other factors

Many other factors affect farmland rental rates, ag officials say. The long list includes:

• Two or more farmers could be bidding against each other to rent the same land, pushing up its rental rate,

• Local property taxes in some areas have risen sharply in recent years, making landowners there — who must pay those higher taxes — less willing to accept lower rental rates.

• Landowners with little or no direct connection to ag might not realize or care that crop prices and farm profitability are poor.

• Rental rates for high-quality land, or the land most likely to produce good yields, generally fall less than rates for poorer-quality land. There's less risk for the better land, and renters generally will pay more for that greater security.

• When the expired lease was negotiated can be critical, too. A one-year lease negotiated in 2017, and that expired in 2018, may have reflected the drop in farm profits; consequently, a further cut in the new one-year lease may not be in order. But a four-year lease negotiated in 2015, and that expired in 2018, may not fully reflect the current farm economy and the new agreement might be line for a reduction in rental rates.

"A lot depends on where you are in the cycle," Mertz said.

Negotiation tips

Experts offer these basic suggestions to help farmers and landlords reach agreement on farmland rental rates:

• Reliable, impartial statistics and perspective are critical. Extension service officials and experienced ag bankers in your area can help to provide them.

• So-called flexible rates, which are adjusted to reflect crop prices or yields or both, can be an option, in place of a fixed cash payment. Flex rates allow landlords to take in more money in good years and farmers to pay less in bad years. Crop shares — in which landlords receive a share of the crop — is the best-known type of flex rate.

• Farm management companies are an option for landlords without the skill, knowledge or inclination to negotiate personally.

• Always remember there are two sides to the negotiation, and that both the farmers' side and landlords' side are important and should be reflected in the final agreement. Ask yourself, "This deal I'm proposing — if I were on the other side of the table, would I think it's fair?"