Landlords want more, farmers willing to pay more

It's happening again.

Area farmland rental rates, which have been rising for years, are shooting higher this fall, too, as farmers and landlords renegotiate rates on land covered by expiring rental contracts.

Landlords want more money, and farmers will pay more, albeit reluctantly.

Official figures won't be available until next year. But initial reports indicate substantial rental rate increases in much of the region.

Statewide in North Dakota, rental rates for land in expiring contracts are increasing by an average of 20 percent from a year ago, estimates Charles Peterson, Fargo, N.D.-based vice president/Farm Management Group for US Bank, which represents clients who own about 1 million acres of farmland.

In other words, farmland that rented for, say, $50 per acre last year in an expiring lease will, on average, rent for $60 per acre next year in a renegotiated contract.

Overall, cropland in the state rented for an average of $51.50 per acre going into the 2011 growing season. That was up from $39 per acre in 2006, according to figures from the National Agricultural Statistics Service, an arm of the U.S. Department of Agriculture.

That $51.50 average, which is based on both expiring leases that will be negotiated and unexpired leases that will stay the same, will rise going into the 2012 growing season, although experts say it's premature to estimate how much.

Even in the Minot, N.D., area, in northwestern North Dakota, where many fields weren't planted this spring because of wet conditions, "rents are strong," says Bradley Haugen, of Haugen Farm Realty in Minot.

Ward County, in which Minot is located, led the state with an estimated 576,000 unplanted acres this year. That was roughly 63 percent of the county's farmland.

Farmers, of course, aren't exactly thrilled with higher rental rates.

"No self-respecting farmer wants to pay more in rent," says Terry Weckerly, a Hurdsfield, N.D., farmer and president of the North Dakota Grain Growers Association.

He estimates that rental rates in new leases in his area, in central North Dakota, are rising about 20 percent this year.

Weckerly also says farmers understand the realities that are driving rental rates higher.

- Crop prices generally are much higher than they've been historically. Currently, for instance, spring wheat fetches an average of about $8.70 per bushel at area elevators surveyed weekly by Agweek. Six years ago, the average price of spring wheat at area elevators was about $3.80 per bushel. Farmers note that their expenses have shot higher in the same period as well.

- Generally warm, dry conditions this fall have allowed farmers to finish harvest and prep fields for planting next spring. That raises hopes for good crops next year. It also can put landlords in a stronger bargaining position,

- Some young adults, attracted by attractive crop prices in recent years, have come back to the family farm. Having another family member in the operation encourages it to get bigger and rent more land.

- In Minnesota, county real estate taxes are rising. Some landlords want to pass along at least part of the increase to tenants in the form of higher rents.

- The surge in crop prices that began in 2007 had only a limited affect on farmland rental rates right away. The "lag affect" means higher rental rates now more fully reflect higher crop prices.

- Federal crop insurance helps to soften the financial blow in tough years, which tends to prop up rental rates in areas where rates otherwise might decline because of poor crops.

- Farmland prices have risen sharply in recent years, causing many landlords to want higher rent for their land.

In 2006, North Dakota cropland was worth an average of $610 per acre and fetched an average of $39 per acre in rent, according to National Ag Statistics Service figures.

Going into the 2011 growing season, cropland in the state was worth an average of $1,040 per acre, an increase of 70 percent from the 2006 number.

Cash rent had risen to $51.50, an increase of 32 percent. Farmland values have risen faster than cash rents, at least in part, because unattractive rates for investments such as CDs and savings accounts have encouraged some investors to buy farmland, pushing up its price.

Be careful with estimates

Use care in interpreting the estimates of how much farmland rental rates are increasing.

As Peterson notes, his estimate of a 20 percent increase is an average -- the increase is higher in some parts of the state, lower in others.

Nor does it mean that rental rates of all North Dakota farmland will rise 20 percent from a year ago. It refers only to farmland in expiring agreements, not land in contracts that don't expire after this growing season. Typically, farmland in the area is rented under one- to four- or five-year contracts.

Also keep in mind that increases in rental rates can vary within the same geographic area.

In the area around Hallock, Minn., in the northwestern part of the state, renegotiated farmland rental rates are "varied," with some seeing little or no change and others increasing by as much as 30 to 40 percent, says Paul Craigmile, market president of agriculture and business banking for American Federal Bank in Hallock.

Some landlords, because of their relationship with their tenant, were content with little, if any, increase, while some landlords wanted as much money as they could get, he says.

The average increase in his area is 10 to 15 percent, he estimates.

A final caveat: Area land rents being renegotiated typically involve expiring contracts that ranged from one to five years in length. Rates negotiated four or five years ago wouldn't reflect increases over the past few years and, consequently, have more "catching up" to do than rates negotiated in the past two or three years

The length of the expired contract needs to be considered when calculating how much a rental rate has risen, says Andy Swenson, North Dakota State University Extension Service farm management specialist.

For example, if rent on land covered by an expiring three-year contract rises by 20 percent, the increase of 20 percent is spread over three years, for a 6.6 percent annual increase. The annual increase is bigger if spread over two years, smaller if spread over four or five years.

Overall increase

Swenson says farmland rental rates definitely are increasing, although he doesn't want to speculate on much.

But he does expect that the average overall rental rate in North Dakota will rise by about half as much as the increase in land covered by expiring contracts.

If so, and rental rates in land covered by new lease rise by, say, 20 percent, then the average overall rental rate in the state will rise by about 10 percent. If the increase in new contracts is, say, 15, percent, then the average overall rental rate will rise by about 7½ percent.

If the overall average rate rises by 10 percent, then the per-acre cash rent for North Dakota cropland would rise from $51.50 to about $56.65.

Elsewhere in the region

Rental rates also have been increasing in Minnesota, South Dakota and Montana, according to the National Ag Statistics Service.

In South Dakota, the average per-acre rental rates for non-irrigated cropland rose from $71.50 in 2010 to $78 in 2011.

The average per-acre rental rates for Minnesota non-irrigated farmland rose from $121 in 2010 to $135 this year.

In Montana, the average per-acre rental rate for non-irrigated farmland rose from $22 in 2010 to $23.50 in 2011.

Again, keep in mind that the statewide average increases were far from uniform throughout the three states. The overall increases included substantial variation in counties, with average rental rates in some counties even dropping from 2010 to 2011.

Changing times, rents

Forty years ago, farmers in the area generally rented land under crop shares -- paying for the right to farm land with a share of the crop produced on it rather than with a fixed per-acre cash payment

Over time, cash rents have become the norm, today accounting for 90 percent of more of all rents, officials estimate.

Crop shares have fallen out of favor for several reasons, farmers and ag officials say:

- As farms get bigger, farmers typically rent from more landlords. Producers find it easier to pay cash than to keep track of how much grain the various landlords are entitled to.

- The crop-sharing method traditionally requires the landlord to pay a portion of the tenant farmer's expenses of putting in the crop. Determining what the landlord's portion of expenses should be becomes more difficult as technology's role in ag grows.

- Some landlords, especially ones living far away from their land, are concerned that they might not receive their full, fair share of the crop.

- A growing number of landlords, many of them retirees, prefer the certainty of a fixed payment in cash rent to the variability of crop shares.

In general, the case against crop shares, particularly from the farmer's perspective, is that "it just gets so complicated," Weckerly says.

Being flexible is an option

There's a third alternative, one that combines aspects of cash rent and crop shares.

So-called flexible rent allows the landlord to share both the risks and rewards of the farmer. With flexible rent, landlords are paid in cash. But the payment varies, according to fluctuations in price or yields or both.

"There are many ways to set up a flexible land renal agreement. The farmer and landlord should determine what both are looking for," according to information from University of Minnesota Extension Service.

One method is setting a base rent that includes a bonus payment to landlords if yields or prices, or a combination of the two, exceed specified targets.

Extension officials and farmers say flexible rents hold potential, but they think the need to keep track of yields and prices in flexible leases will work against the popularity of such arrangements.

Contact your local extension agent for more information on flexible rents.

Lurking in the background is the future of direct payments.

Direct payments are cash subsides for eligible historic production of crops including wheat, corn, barley, oats, soybeans and other oilseeds.

The amount of the payments vary in North Dakota, but typically come to about $9 or $10 per acre, officials say.

Historically, producers generally end up paying out at least some of the direct payments they collect on rented land in the form of higher cash rents, ag officials say.

Put differently, direct payments help to prop up cash rents.

But pressure in Washington to reduce federal ag spending almost certainly will lead to eventual cuts in, if not the elimination of, direct payments, ag officials say.

So far, that doesn't seem to have factored in cash rent negotiations.

"They don't care," Weckerly says of how landlords respond to the possibility that direct payments will be lost.

Swenson says farmers should talk with landlords about direct payments and their affect on cash rents.

Sooner or later, he says, rental rates will be affected by what happens with direct payments.