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Higher Land Rental Rates For 2013

Written by: Kent Thiesse

The continued strength in corn and soybean commodity prices in the past few months, and the resulting increase in crop income per acre for 2012, has caused many landlords to consider significant increases in cash rental rates on farm land for 2013. This comes after substantial increases in most rental rates from 2008-2012. Many crop producers are concerned that the favorable crop prices may not last long term, and that the gross income per acre in future years may not be high enough to justify the higher cash rental rates that are being proposed for the 2013, or potential future rental rate increases. In addition, crop input costs for seed, fertilizer, chemicals, fuel, and crop drying are likely to be higher in 2013, after a rise of about 10-20 percent for the 2011 and 2012 crop years.

 

Even though current cash prices for corn and soybeans have remained quite strong, local cash prices for the Fall of 2013 are currently below $6.00 per bushel for corn and below $13.00 per bushel for soybeans at most locations in Southern Minnesota. At normal yields and cost of production, many producers will be looking at break-even market prices for 2013 near $5.00 per bushel for corn and $12.00 per bushel for soybeans. These price levels, or even lower, could become reality with more normal crop weather patterns across the U.S. during the 2013 growing season. Many farm operators are concerned that if land rental rates become too high for 2013, it may be very difficult to break-even next year, if there is a much larger level of U.S. crop production and lower grain prices.

 

Whether a new Farm Bill is passed or not for the 2013 growing season, the guaranteed direct payments that farm operators have received for the past couple of decades will likely be eliminated or reduced for 2013. The direct payments amount to an average of about $25.00 per acre for corn and soybean producers in most South Central Minnesota counties. Many landlords have built that direct payment amount into the land rental rates that have been charged in recent years.

 

Some landlords in Southern Minnesota, but not all, asked for substantial increases in year-to-year land rental rates for the 2012 growing season, and are now considering further increases for the 2013 crop year. Also, some larger producers have been going into new areas and offering much higher land rental rates than the current existing cash rental rates for the 2013 growing season, reflecting the current higher level of grain prices. Average land rental rates in South Central Minnesota increased by an average of 12.8 percent from 2010 to 2011, based on the University of Minnesota land rental analysis data. Land rental rates in this area of the State increased by an average of 10.8 percent per year from 2007-2011, and likely increased another 10-20 percent for the 2012 crop year.

 

Farm operators are put in a difficult position when landlords demand much higher cash rents for 2013, because they do not want to lose the crop acres, and they may have already prepaid some of the crop expenses for seed, fertilizer and chemicals for the 2013 growing season. 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 the current cash rental payment they are receiving from a long-term farm operator. In most cases, this requires some negotiation between a landlord and the current farm operator to arrive at an equitable rental rate for 2013 and beyond.

 

An alternative to the proposed high cash rental rates for 2013, or potentially even higher rental rates in the future, may be for producers and landlords to consider a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop yields and market prices vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on how the flexible lease is set up.

 

A “true” flexible cash lease allows for the landlord to receive additional land rental payments for a crop year above a “base” land rental rate, if the actual crop yields and market prices, or the gross revenue per acre, exceed established “base” figures. A “true” flexible cash lease would also allow for the “base” rent to be adjusted downward, if the actual crop yields and prices, or revenue per acre, fall below the established “base” figures. However, many flexible leases have been modified, and only “flex” upward with added rental payment to the landlords, if the “base” crop yield and prices, or revenue per acre, are exceeded. The modified cash lease approach is probably acceptable if the “base” cash rental rates are within a reasonable range.

 

There are many variations to setting up a flexible lease agreement between a landlord and farm operator. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate. It is extremely important that all aspects of a flexible land rental lease agreement be spelled out in detail in a written rental contract, which is signed by all parties. Successful “flexible cash lease agreements”, as well as normal land rental agreements, have always involved cooperation, trust, and good communication between the farm operator and the landlord.

 

For additional information on flexible land rental leases and sample land rental contracts, forward an e-mail to :  kent.thiesse@minnstarbank.com