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High Land Rental Rates

Written by: Kent Thiesse

Cash corn and soybean prices have dropped significantly in the past few months, and the projected forward prices for the Fall of 2014 do not show much improvement, or could be even lower. This is causing some concern among farm operators, as they negotiate land rental rates for the 2014 crop year. Most of the Upper Midwest experienced some rather large increases in cash rental rates in recent years, reflecting the much higher levels of crop prices that existed in the past 2-3 years, prior to the last half of 2013. Some 2014 land rental rates may be set at levels that do not offer much opportunity for profit potential from crop production in 2014, or could even result in a net loss to the farm operator.

 

Cash corn prices in Southern Minnesota are currently near $4.15 per bushel, and cash soybean prices are near $12.85 per bushel. The comparable new crop prices for the Fall of 2014 are almost at the same level for corn, but are only about $11.00 per bushel for soybeans. By comparison, the cash corn price in late November of 2012 was near $7.35 per bushel, with the local soybean price just over $14.00 per bushel, with the 2013 new crop prices estimated at about $5.80 per bushel for corn and $12.50 per bushel for soybeans. In 2011, the late November local cash prices were near $5.75 per bushel for corn and $11.00 per bushel for soybeans.

 

Average crop input expenses for corn and soybean production in Southern Minnesota, excluding land costs, have risen about 20-30 percent from 2011 to 2013, primarily due to increases in seed and fertilizer costs. Total cash expenses for corn production are expected to decrease slightly for 2014, due to a slight decline in expected fertilizer costs for the coming year. Of course, corn and soybean production costs are highly variable from farm-to-farm, depending on fertility level, availability of livestock manure, and the efficiency of the farm operator.

 

Farm operators are encouraged to use caution when agreeing to high cash rental rates for 2014, or when bidding on rental rates for new crop land that becomes available. Following are some things to consider :

 

  • Crop insurance guarantees for 2014 are likely to be considerably lower than in 2013, which will add significantly more risk to crop production next year, especially for corn. For example, a farm with a 190 bushel per acre APH yield, with a base price of $5.65 per bushel, with an 80 % revenue protection crop insurance policy, had a crop insurance guarantee of $858.80 per acre in 2013,. The current estimate for a corn crop insurance base price in 2014 is about $4.55 per bushel, which would result in an insurance guarantee of only $691.60 per acre for next year, with the same APH yield and insurance coverage level as in 2013.

 

  • Farm operators should assess the risk potential of high dollar land rental rates before finalizing a 2014 land rental rate on new or existing farm land. It is best to use realistic projected crop yields and prices, average costs of production for the farm operation, including machinery and facility overhead expenses, and a desired return to the farm operator’s labor and management. If the land rental rate is much higher than break-even levels, the producer must try to negotiate a more reasonable rental rate or flexible agreement, or face the difficult decision to let the land go.

 

  • Farm operators should make sure that land rental agreements with landlords are finalized for the coming year prior to paying for 2014 crop input costs on those rented acres, or before forward contracting a portion of the anticipated crop production for future delivery. It could be an expensive mistake, if the landlord suddenly chooses to cash rent those those land rental acres to another farm operator for 2014, and the original farm operator has prepaid the crop inputs, or has forward contracted grain from those anticipated acres. 

 

  • An alternative for farm operators may be to enter into a “flexible cash rent agreement” with a landlord, which sets a reasonable “base rental rate” that is based on average crop yields, typical production costs, and projected 2014 prices. A “flexible lease” should have provisions to increase the final annual rental rate in the event of exceptional crop yields and/or much higher than anticipated crop prices next year. These final cash rent adjustments should be based on actual crop yields and market prices in 2014, with any rental rate adjustments occurring on the final land rental payment for the year. 

 

  • 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). Good communications between a farm operator and a landlord is always a main key to avoid problems and arrive at workable solutions on land rental issues.  

 

For additional information on land rental rates, flexible land rental leases, or land rental contracts, contact Kent Thiesse at (507) 726-2137 or via e-mail at :  kent.thiesse@minnstarbank.com