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Use Caution on Cash Rental Rates

Written by: Kent Thiesse

Cash corn and soybean prices have been strong for the past 12-18 months, which is spurring some very rapid and dramatic increases in annual cash rental rates. Cash corn prices in Southern Minnesota are near $5.75 per bushel as of 11-21-11, and cash soybean prices are near $11.00 per bushel; however, local corn prices were as high as $7.00 per bushel in early September, and were above $6.00 per bushel, until mid-November. Local cash soybean prices were above $13.50 per bushel in early September, before dropping back to the current price levels. Producers can still forward price their 2012 corn at a new crop local price near $5.00 per bushel, and 2011 soybeans near $11.00 per bushel, which are slightly below the current cash grain prices. These higher commodity price levels for 2011 corn and soybeans, as well as very good price prospects for the 2012 crop year, are definitely being reflected in higher land rental rates across the Midwest.

Some landlords in Southern Minnesota, but not all, have been asking for substantial increases in year-to-year land rental rates for the 2012 growing season. Also, some larger producers have been going into new areas and offering much higher land rental rates than existing cash rental rates. Farm operators are put in a difficult position when landlords demand much higher cash rents for 2012, because they do not want to lose the crop acres, and may have already prepaid some of the crop expenses for seed, fertilizer and chemicals for the 2012 growing season. Total cash expenses for corn production are expected to increase slightly for 2012, after a rise of about 10-15 percent for 2011, primarily due to a significant increase in fertilizer costs. Landlords are also put in a difficult position when another farm operator offers them a substantial increase in annual land rental rates, as compared to their current cash rental payment they are receiving from a long-term farm operator. In most cases, this requires some negotiation between a landlord and a farm operator to arrive at a fair rental rate.

Farm operators are encouraged to use caution when agreeing to large increases in 2012 cash rental rates, or bidding high cash rental rates on new crop land that becomes available. Some things to consider :

·        It may be possible to “cash flow” and show a profit on higher land rental rates for the 2012 crop

      year, if a producer utilizes forward pricing and a “Revenue Protection” (RP) crop insurance

      policy to reduce the financial risk. However, what will be the future profitability be on the “high

      rent” crop acres in 2013, 2014, and beyond, if commodity prices are lower, and landlords are not

      willing to lower cash rental rates ?

·        Another alternative may be for farm operators to enter into a “flexible cash rent agreement” with

a landlord, which sets a reasonable “base rental rate” that is based on 5-year average crop yields and prices, but has provisions to increase the final annual rental rate in the event of exceptional crop yields and/or much higher than anticipated crop prices during that crop year. These final cash rent adjustments are made after the growing season, are paid on the final rent payment for the year, and are for that year only. The following year the “base rental rate” either stays the same, or is re-negotiated, and a new “flexible agreement” starts.

·        Farm operators should make sure that land rental agreements with landlords are finalized for 2012 before paying for 2012 crop input costs on those rented acres, or before forward contracting a portion of the anticipated crop production at a market price for future delivery. It could be an expensive mistake, if the landlord suddenly chooses to cash rent those anticipated 2012 land rental acres to another farm operator, and the original farm operator has prepaid crop inputs on those acres, and has contracted grain from those anticipated acres that now must be purchased to fulfill those grain contracts. 

·        Farm operators should make sure that there is a written contract with all landlords that lists the amount of cash rent, payment dates, any “flexible payment” stipulations, and specifies a notification date if the land will be rented to another party (to avoid the earlier situation). If livestock manure will be used for fertilizer, extra tillage will be performed for corn-on-corn acres, or any other special crop production circumstances, it is good to discuss these items with a landlord and include them in a written lease agreement.

·        Good communications between a farm operator and landlords is the main key to avoid problems and arrive at workable solutions on land rental issues.  

·        Land Rental Resources --- Iowa State University has some very good resources on cash rental contracts and flexible cash leases, including information sheets, excel spreadsheets, and sample written cash rental lease contracts, which are available on their “Ag Decision Maker” web site, which is located at : http://www.extension.iastate.edu/agdm/. For additional information on land rental rates, flexible land rental leases, or land rental contracts, forward an e-mail to : kent.thiesse@minnstarbank.com