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Welte: Leases and low prices

The prices farmers get for wheat delivered to local elevators today is $4.40 per bushel. By comparison, the price three years ago was $8.50 per bushel.

Peter Welte

The prices farmers get for wheat delivered to local elevators today is $4.40 per bushel. By comparison, the price three years ago was $8.50 per bushel.
The price of soybeans delivered today to the local elevator is $7.80 per bushel. Three years ago, it was $16.50.
And corn today is $2.85. Three years ago, it was $7.35.
Few farmers own all of the land they farm. In fact, a large majority of tilled farmland is rented by farmers - tenants - from the owners of the land - landlords. Three years ago, relations between most tenants and landlords were positive.
I personally know of at least three farmers who were actually delivering “bonus rent” to their landlords after the bumper crops and soaring prices of 2012. And bear in mind, 2012 was many years after that magical February in 2008 when the price of hard red spring wheat hit $20 per bushel at local elevators.
But now commodity prices are tumbling, and the costs of production have not decreased in a similar fashion. Costs of fertilizer and diesel fuel and gasoline haven’t changed much. Equipment costs are much higher than three years ago. Costs of repair are constant. Chemicals still cost the same and, in some instances - glyphosate, for example - are even higher than they were three years ago.
The writing is on the wall: lower revenue plus constant or higher expense equals lower profits. Or, in many instances, negative profits.
So what many landlords and tenants are faced with is the prospect of tension regarding longer-term land leases that were executed when grain prices were much higher.
As with any legal situation, there are two sides to the story.
For landlords, many of these leases were negotiated at the insistence of the tenants. So why should landlords back down from a lease that was negotiated at arm’s length? After all, a deal is a deal, through good times and bad. Additionally, the farmers who were enjoying the salad years should have socked money away to anticipate years like these.
For farmers, the argument is they ought not to be forced to farm at a loss. After all, if the farmer goes broke, it costs the landlords to locate and secure a new renter. And that new renter would have to only pay market price for the land, which should be reduced in light of lower profitability of farms as a whole.
Longer-term leases aren’t entirely a bad thing. They do provide certainty to both the tenant and the landlord, ensuring that land improvements, such as drainage, are enjoyed by the tenant who initiated them. Additionally, a longer-term lease provides revenue certainty to the landlord. And landlords love certainty.
That sound logic goes out the window when farmers are faced with significant losses across the board on all three major commodities.
What are the options? One option is cancellation of the lease, usually instituted by the farmer. But for unwilling landowners, that option could get costly - and untenable - to the farmer in legal fees.
Many landlords and farmers are mutually modifying leases to a “crop share” arrangement, which is in theory the fairest type of lease available, provided there is a clear split of production costs. A crop share lease permits the primary risk taker - the farmer - to spread that risk, and even to shift some of it to a willing landlord.
Another option is to rewrite the cash lease, with a lower rent, if both parties are willing to do so. For landlords who are satisfied with the stewardship of their land, this is a fairly common option.
Times like these are a reminder of why it is crucial to maximize options and seek legal assistance in the drafting of any lease.
Editor’s note: Welte is an attorney at the Vogel Law Firm and a small grains farmer in Grand Forks County.

Related Topics: CROPS
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