Farmland Rental Rates Dropping Overall01/16/2017
Renegotiating expired farmland rental rate agreements — a process now underway across the Upper Midwest — can be one of the toughest jobs in agriculture. Farmers and landlords often have differing perceptions of what’s fair and reasonable.
The task might be especially challenging this winter because of two conflicting trends:
Many farmers, pointing to continued poor crop prices, want to pay less for the land they rent. Many landlords, pointing to excellent overall 2016 yields, don’t want to accept less.
The most likely outcome is that rental rates overall will drop a bit across the Upper Midwest, with so-called “high-end rates” — ones paid by aggressive operators who hoped for strong crop prices — falling the most, say farmers, ag bankers, extension specialists and other who talked with Agweek.
In Minnesota, for instance, “I’m estimating an overall decline of 7 percent, with a lot of that high-end rates,” says David Bau, University of Minnesota extension educator for agricultural business management.
That decline would be comparable with 2016, when Minnesota average rent for nonirrigated farmland fell to $160 per acre from $170 per acre the previous year.
Across the Upper Midwest as a whole, rental rates typically fell 5 to 20 percent from 2015 to 2016, though there were many exceptions.
Bau stresses his 7-percent estimate is just an average, one that masks big variations from area to area. Rates likely will hold steady, or even increase slightly, in some areas, especially ones that enjoyed record or near-record yields in 2016, he and others say.
Other factors affect those variations, too. The list includes where the land is, the types of crops grown there, the size of 2016 federal safety-net payments to farmers in the area and the extent to which rental rates there rose the 2008 to ’13 ag boom.
One example: Pulse crops, which include lentils, were relatively profitable in 2016 for farmers in western North Dakota and eastern Montana, where the climate is well suited to grow them. Will that affect what farmers who raised them in 2016 — and expect to grow them again in 2017 — pay to rent land?
“For some people, I’d say yes,” says Kate Binzen Fuller, assistant professor and extension specialist with Montana State University. But she also notes that expanding into pulse crops requires an investment in new equipment, as well as learning to grow them, which complicates assessing their impact on rental rates.
Location also affects farmland rental rates in areas, such as the Gallatin Valley around Bozeman, “where some landowners are weighing the tradeoff between selling land off for development or keep it in ag,” Fuller says. “In certain areas of Montana that are growing really rapidly or seeing a lot of tourism, I think that’s definitely part of the story as well.”
But geography’s biggest impact on 2017 rental rates will be in areas that didn’t harvest the big 2016 yields enjoyed elsewhere in the region. Excess rain, in particular, was a huge problem, especially in northeast North Dakota.
Brian O’Toole, a Crystal, N.D., farmer, says his farm received more than 40 inches of rain this growing season, twice as much as usual. That cut sharply into crop yields.
As a result, “Some of the rents will be going down,” in his area, he says.
Whether yields fall, and how much, depends at least in part on landlords’ willingness to listen to farmers and understand their concerns, says O’Toole, who stresses that his landlords are good to work with.
All landlords, including ones in areas with good yields, need to realize that “one good crop doesn’t make up for poor prices. It might survive you for a year, but it doesn’t solve the issue,” says John Weinand, a Hazen, N.D., farmer and president of the state Grain Growers Association.
One apparent trend this year: Some leases are taking longer than usual to work out.
“I think some farm operators and landlords have been a little slower than normal in finalizing land rental agreements due to the uncertainty with profitability in crop production for 2017,” says Kent Thiesse, farm management analyst and vice president of MinnStar Bank in Lake Crystal, Minn.
Farmers want to have rent agreements wrapped up by early spring, at the latest, so they can secure financing to plant, protect and harvest their crop, Weinand says.
End of the boom
Strong crop prices during the 2008 to ’13 boom boosted farm profitability, encouraging landlords to ask for higher rental rates and allowing farmers to pay more. Corn, in particular, provided strong returns, pushing up rental rates the most in areas where the crop is common.
Cass County, in eastern North Dakota, reflects the trend in areas where corn and soybeans are major crops. It’s the nation’s leading producer of soybeans and a major corn producer. The average per-acre rental rate for nonirrigated cropland in the county nearly doubled from 2008 to ’15, rising from $67.50 to $125.80. It 2016, however, it dropped to $117.
Farmland rental rates are said to be “sticky.” They go up slowly in good economic times, but also go down slowly when times are tough. That’s because many leases are for multiple years, so what happens in one crop season isn’t necessarily reflected in the rent that a farmer pays the following crop season.
That’s why rates generally rose from 2012 to ’15, even though crop prices declined in the same period. U.S. farmers received an average of $3.23 per bushel for corn in November 2016, the last month for which data is available. That’s down from $3.59 a year earlier, $3.77 two years earlier, $3.77 three years earlier, $4.35 four years earlier and $7.02 in November 2012.
So, the overall decline in rental rates from 2016 to ’17 reflects, in part, the drop in crop prices in previous years that hadn’t yet been accounted for fully in rents.
Overall rental rates began falling a year ago, the result of declining crop prices and the likelihood that few farmers would be profitable in 2016 without big yields. Experts predicted in the winter of 2015 to ’16 that rental rates for 2017 would fall sharply if yields were average or poor in the 2016 crop season.
As always, many factors affect rental rate negotiations. They include:
- Local and county land taxes paid by most farmland owners are rising, in some cases substantially. “Besides the better-than-expected crop yields in 2015 and 2016, another factor that has kept landlords from lowering rents to a greater extent is rapidly rising property taxes on non-homestead farmland in many areas of Minnesota,” Thiesse says.
- A growing number of farmland owners have little or no personal connection with ag. They might not realize or care that crop prices and farm profitability have plunged.
- Increased interest from investors in buying farmland. “Because record high land prices from two years ago have come down, investors are now looking at farmland as a viable investment,” says Brian Mohr, Garretson, S.D.-based area sales manager for Farmers National Co., which offers farm management, real estate sales and other services.
- Individual situations, such as two farmers bidding against each other to rent the same field.
- Some farmers, especially in parts of Minnesota, received substantial federal safety-net payments in 2015, but little or no such aid in 2016. That affects what they’ll pay for 2017 rent, Bau says.
Area extension officials promote the value of flexible rent. They say such agreements are a useful way to manage risk.
Typically, flexible rent includes a base rent or payment to the landlord, with the base payment supplemented by additional payments based on crop prices or yields or both. The practice allows farmers and landlords to share in financial success when times are good, while also reducing farmers’ expenses and landlords’ return in tough times.
Flexible rents haven’t been popular, however, because many landlords prefer the certainty and simplicity of fixed rent. It’s difficult to judge if that’s changing this negotiating season.
“I haven’t seen many (flexible rents) yet, but I have been encouraging people to think about them,” says Fuller, with Montana State University. “While they can be a bit of extra work, they can benefit landowners in good years and producers in bad years. And, they can make what right now may be a pretty painful re-negotiation process pretty automatic.”
Source: Jonathan Knutson, Agweek