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Farmers, landowners renegotiate rental agreements

In a normal year, many Upper Midwest farmers and landlords already would have agreed on 2015 rental rates for cropland and pasture. In a normal year, agricultural producers, bankers and economists would have a pretty good handle on rate trends fo...

In a normal year, many Upper Midwest farmers and landlords already would have agreed on 2015 rental rates for cropland and pasture. In a normal year, agricultural producers, bankers and economists would have a pretty good handle on rate trends for the new year.

This isn't a normal year.

Plunging grain prices, a late harvest and uncertainty about land values and important farm programs have delayed reaching new agreements on most contracts that expired after the 2014 crop season. Some contracts might not be finalized until this spring, when more is known about 2015 crop prices, land values and farm programs.

"There's been a wait-and-see attitude." says Allen Graner, an instructor with the North Dakota Farm Management program based in Rugby. "It will get a lot of attention this winter, though."

But one thing is clear. The long run of annual across-the-board increases, which saw some rental rates double in the past half-dozen years, has ended, at least temporarily.

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"Producers will be looking hard at what they're paying," says George Haynes, an agricultural economist with the Montana State University Extension Service.

Haynes and others involved in regional agriculture say generalizations at this point are risky. Volatile crop prices and anticipated planting conditions this spring will influence what individual farmers end up paying to rent land.

For now, though, it appears across-the-board rate increases will be replaced by three smaller trends:

• Some expiring rates, especially ones negotiated at high levels in the past year or two by aggressive producers, will come down.

"The highest rates will be the first to come down," says Kim Dillivan, South Dakota State University Extension Service crops business management field specialist.

• Some expiring rates, especially ones negotiated three or four years ago when rates were still relatively low, have a bit of catching up to do and could rise slightly.

"Rents that haven't been changed in three or four years might be behind the market. They might increase," Dillivan says.

• Some expiring rates will stay roughly the same.

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"In my area, it's a holding pattern," says Noah Hultgren, a Willmar, Minn., farmer and vice president of the state Corn Growers Association.

Paul Craigmile, market president of agriculture and business banking for American Federal Bank in Hallock, Minn., says new rental rate numbers in his area are neutral or static.

"Landlords aren't willing to go down (with their rental rates), and farmers aren't wanting to lose land. So they're agreeing on the same price they had before," he says.

Rental rates are 'sticky'

Generally strong grain prices from 2008 to 2013 allowed farmers to make more money. That made rented farmland more valuable, and landlords wanted higher rents -- and tenants were willing and able to pay more.

Now, grain prices and farm profitability have tumbled, making rented land less valuable and reducing tenants' ability and willingness to rent land.

That won't cause overall rental rates to tumble right away, though.

Farmland rental rates often are described as "sticky," which means they're slow to rise and fall in response to changes in farm profitability. Changes in rental rates this winter won't be based only on what's happened in the past year; they'll reflect what happened in the past two to four years, as well.

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If you're a landlord who agreed to, say, a four-year contract in 2010, you missed out on the subsequent increase in rental rates. And you might expect the new contract negotiated this winter to "catch up" on at least some of that lost increase, experts say.

On the other hand, farmers' expenses have risen in the past few years and some, such as county land taxes, won't be going down, Haynes says.

Landlords need to keep that in mind when renegotiating expiring leases, he says.

Length, size of contracts

Upper Midwest farmers generally rent land on one- to five-year contracts. The length is influenced by the number of crops they raise in an annual rotation on a field. Different crops have differing chemical and fertilizer needs, and longer contracts allow farmers who raise multiple crops to be more efficient. A producer who raises, say, just corn and soybeans might have a relatively short contract, while a farmer who rotates three or four crops might have a relatively long contract.

Other factors also affect a contract's length and size. Aggressive farmers often are willing to pay more per acre, but only if they're locked in for just a year or two. And some tenants want as much money as they can get, while others will accept a little less money or a longer contract, or both, if they have a good relationship with the farmer.

Craigmile notes that some farmers in his area paid bonuses, in addition to the agreed-upon cash rents, when crop prices were high.

Farm bill's effects

The 2014 farm bill, the centerpiece of the federal government's food and ag policies, contributes to the uncertainty about what farmers will pay to rent land.

The new legislation made many changes, including eliminating direct payments, which gave farmers a fixed amount of money per acre regardless of crop prices or yields. Though relatively small, the payments provided farmers with a sure source of income that helped prop up rental rates, experts say.

"Anytime you see a restriction in the amount of available cash flow, that will have an influence on how much a producer can pay for cash rent," Graner says.

The 2014 farm bill also created two new programs, Agricultural Risk Coverage and Price Loss Coverage. ARC protects against falling revenue. PLC provides payments when crop prices fall. To complicate matters, ARC comes in two versions: the county level and individual producer level.

Farmers must choose between ARC or PLC and are locked in until 2018 once they've made their decision. Most producers are still evaluating which option is better, and they have until March 31, 2015, to decide. That's slowed the normal pace of rental rate renegotiations.

Land values, weather

Uncertainty about land values also is delaying rental rate renegotiations.

Some landlords, or the people who manage their farmland, link per-acre rental rates with the value of the land. For instance, rental rates will be higher on farmland that sells for, say, $2,000 per acre than land that sells for $1,500 per acre.

Land prices have soared in recent years, helping to push up rental rates. Now, plunging crop prices and farm profitability will work against land prices, but it's too early to say how much and how soon, experts say.

As a result, Charles Peterson says his organization is waiting to renegotiate expiring rental rates until there's a better handle on land sales this winter.

Peterson is a Fargo, N.D.-based vice president of U.S. Bank's Farm Management Group. He's also active in the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers.

Rental rate negotiations also were pushed back by the wet spring that hampered planting and the wet fall that complicated harvest.

"They (producers) got behind, and they were scrambling all year to keep up with what was happening," Graner says. "But that (rental rate negotiations) has been in their back of their minds. Now it'll be getting more attention."

Related Topics: CROPS
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