Last fall, Upper Midwest farmers wrapped up what was one of the most unusual crop seasons in recent memory: 2020 brought late planting, escalating soybean prices, big one-time federal payments, severe weather damage in places, a wonderfully smooth harvest and of course COVID-19.
Now, many agricultural producers are renegotiating cropland rental rate contracts that expired after the 2020 crop season. But despite the fireworks in the past crop season, renegotiations generally aren't notably different from talks in most recent years.
This winter, as in most recent winters, the overall trend is rental rates holding steady or inching higher in many areas, with downward pressure in areas where bad weather cut into yields.
Some cropland in his area was hurt by four major wind storms this past summer, which hammered yields and is pushing down rental rates. But in places where the weather was more cooperative, rental rates are holding steady or rising a bit, Kay said.
Noah Hultgren, a Raymond, Minn., farmer and real estate broker, as well as a past president of the Minnesota Corn Growers Association, said "2020 was a pretty good year" and that he's seeing "a little bit of the trend line higher" on rental rates this winter. (A trend line is the general statistical pattern over time.)
Overall, rental rate trends this winter reinforce conclusions of the annual U.S. Department of Agriculture land values and rental rates report released in August 2020. Though generalizing is risky, Upper Midwest farmland values and rental rates on balance held steady in 2020, with some showing small increases, some staying the same and some dropping slightly, the August report found.
One thing to watch: A number of ag producers appear to be waiting to renegotiate until they have a better handle on 2021 crop prices.
In contrast, the Iowa farmers that Kay knows all nailed down new rental contracts fairly quickly because other farmers want to rent the land, too. "The farmers we work with want to get it locked down and ready to go. Because they know that if they don't, someone else (another farmer) will come right in," he said.
Also factor to consider: As always, spirited competition among several farmers to rent a particular piece of land can drive up its rental rate more than warranted by economics alone.
A little background
Weeds scientists and others urge farmers to rotate at least three crops on fields; dangerous weeds generally are less likely to get established if more than two crops are rotated. But the ag officials who talked with Agweek say there's little, if any, sign so far that the issue is encouraging longer leases.
In the great majority of cases, rent is paid in cash — a fixed, predetermined amount that stays the same regardless of yields and prices. Cash rent continues to be the overwhelming choice this winter, though there are partial exceptions, ag officials say.
So-called "flex rates" are another option to consider, experts say. Flex rates are a combination of cash rent and crop shares, with landlords potentially collecting more or less than straight cash rent depending on some combination of yields or cash prices or both. With flex rates, landlords share in the risk of a poor harvest, while also sharing in the possibility of a good harvest.
In a year like this one, when crop prices could go substantially higher or lower, flex rates — of which there any numerous versions — might be especially useful, Kay said.
Flex rents "diversifies a little bit more the risk (for farmers), which I think is healthy," Kay said. Flex rates "just need to be easily understood by both parties and easily accountable. That's the difficult part."
In any case, ag officials say they're not seeing any big upturn in interest in flex rates this winter.
"I don't really know of any real push for that," Franzen said. "A lot of our farmers have gotten to the point where they prefer the cash (rent) unless they're really close to the landlord."
Key factors in play
- The price of some farming inputs, such as fertilizers and chemicals, are projected to rise in 2021. That will work against some tenants' willingness to pay higher rental rates.
- Prices of some crops, particularly soybeans, have shot higher in recent months. That can give farmers more incentive, and potentially greater ability, to pay higher rental rates. "2020's going to turn out to be a pretty good year for a lot of our folks," Franzen said. "As people look ahead to 2021, they see better profit opportunities. That could fuel a little bit of upward pressure" on rental rates, although "my sense is that most (farmers) will resist that."
- The special one-time, or ad hoc, 2020 payments are expected to have limited affect on 2021 rental rates. "I don't think one year of ad hoc payments making up a big share of net farm income will see a big upward swing" in rental rates, Parman said, adding that the ad hoc payments may make landlords less willing to reduce rates in 2021.
- Interest rates remain extremely low, which helps to hold down borrowing costs. That can give farmers extra ability to pay a little more than they otherwise would to rent land.
- Land taxes continue to rise across the region, which makes landlords less willing to accept lower rental rates.
- Most land values, or the price for which land sells, are holding steady or rising slightly. Rental rates are inherently connected to land values, so healthy land values strengthen rental rates.
- Farmers overall remain in relatively good financial shape, helping to maintain demand for land and the ability to rent it. A recent report from USDA's Economic Research Service found that U.S. farm budget sheets, the financial statement that measures assets, liabilities and equity, are "strong and stable" on balance.
- Despite challenges, including new and dangerous weeds moving into the region, area farmers generally are increasingly efficient and productive. That can make them more willing and able to pay a little extra to rent cropland.
- The 2008-13 ag boom led farmland rental rates to soar in much of the Upper Midwest, particularly for the most fertile land in Iowa and parts of Minnesota, North Dakota and South Dakota. But rental rates in the rest of the region rose substantially less, which reduces pressure on them to decline now.
Historically, Montana's rental rates are steadier than those in farm states to the east, including the Dakotas, Minnesota and Iowa. There appear to be a number of reasons for that, said Fuller and Daniel Bigelow, also an assistant professor in Montana State University's Department of Agricultural Economics and Economics.
Bigelow and others noted that slightly higher rental rates are actually flat when inflation is factored in.
Communication is vital
"Communication is key. As a farmer, I try to keep my landlords as up to date as possible. They want the farmer to make a little money, which is good. It's important that they make enough, as well," Hultgren said. "A lot of these people (landlords) are retired and they derive all their income off of rent," a particular concern when "the cost of living has gone up."
By all accounts, an increasing amount of farmland is owned by nonfarmers who inherited it from deceased relatives. In many cases, the new nonfarming landlords have little, if any, connection with modern ag.
Fuller said "one of the most common questions I get and the phone calls I receive are from someone who's very nervous to talk with their landlord or their tenant (about land rent), particularly from people who have not been involved in the past."
That makes good communication and the potential use of reliable, third-party information even more important, she said.
Tips for negotiating farmland rental agreements
These expert suggestions can be helpful for landlords and tenants trying to come up with a fair cropland rental rate agreement:
- Start with reliable, impartial statistics and expertise. Veteran ag bankers and Extension officials can be useful, as can published or online information from your state Extension agency.
- Both the tenant's and landowner's side is important, and both should be reflected in the agreement. Neither side should get everything it wants; if either the tenant or landlord is completely pleased, something is wrong.
- There may be considerations other than economics. One example: a farmer who helps with routine maintenance in a retired farmer's house might get a break on cropland that the farmer rents from the neighbor.
- Consider so-called "flex rates." Though they can be difficult to implement, they allow the landlord to share in both the risk of bad years and reward of good years.
- Farm management companies are a viable option for landlords, especially ones without the skill, knowledge or desire to negotiate themselves.