December 3, 2018
SETTING 2019 LAND RENTAL RATES IN UNCERTAIN TIMES
Once harvest is completed in any given year, farm operators and non-farm landowners begin the tenuous task of negotiating annual land rental rates for the following crop year. Approximately 60-70 percent of the crop land in the Upper Midwest is under a land rental agreement, and most rental agreements are negotiated on an annual basis. There are some two or three-year leases in existence, which are more common in rental agreements among family members. Arriving at equitable land rental rates for the 2019 crop year is even more of a challenge, given the variable crop yields in 2018 and continued low grain market prices, as well as uncertainty surrounding trade negotiations.
In the past, many land rental arrangements have been between farm operators and landlords that usually have known each other quite well, sometimes being neighbors or family members. However, in recent years, more and more land ownership has been transferred to family members or family trusts outside of the local area where the land is located. Some land owners are hiring the services of a land management company to represent them in land rental negotiations. Many times, farm operators have had very limited previous working relationships with the newer landlords or those representing land owners. This can lead to more challenges when negotiating annual land rental rates, especially during more difficult economic times in crop farming, such as we are now experiencing.
Crop producers in the Upper Midwest are indicating mixed crop production results in 2018, with some producers reporting average or better corn and soybean yields, while producers in other areas had some of their lowest crop yields in the past two decades. Some farm operators in portions of Southern Minnesota and Northern Iowa had corn yields that were 10-20 percent above their 10-year crop insurance actual production history (APH) yields in 2016 and 2017, before having corn yields that were 10-20 percent or more below long-term average yields in 2018. This points out why it is best to use the updated 10-year APH yields, or other verifiable historical yield data, to make yield projections for cash rental rate estimates for the coming year.
Cash corn prices have remained fairly low for nearly over three years (2016-2018) and are not currently showing any signs of significant improvement in the near future. Soybean prices did have a brief rally in early 2018; however, prices declined by nearly a $2.00 per bushel by mid-year, following the Chinese tariffs on U.S. soybean imports. Currently, U.S. soybean export levels to China in recent months are only a fraction of what they were a year ago at this time. Up until 2018, China had been importing approximately one-third of the U.S. soybean production on an annual basis. The estimated U.S. soybean carryover at the end of the 2018-19 marketing year on August 31, 2019 is projected to exceed 1 billion bushels, which would be at the highest level ever recorded.
USDA is currently projecting the national average soybean market price for the 2018-19 marketing year in a range of $7.60 to $9.60 per bushel, or an average of $8.60 per bushel. USDA is estimating the national average corn price for the 2018-19 marketing year in a range of $3.20-$4.00 per bushel, or an average of $3.60 per bushel. Forward price bids in Southern Minnesota for the Fall of 2019 are currently near $3.30-$3.40 per bushel for corn near $8.25-$8.50 per bushel for soybeans, with even lower prices in Western Minnesota and the Dakota’s. It is probably not realistic to base 2019 cash rental rates on projected prices of near $4.00 per bushel for corn and over $9.00 per bushel for soybeans, given the current fundamentals in the grain markets.
Average crop input expenses for crop production in Southern Minnesota, excluding land costs declined somewhat in 2017 and 2018; however, expense estimates appear to be a bit higher for 2019, especially for fertilizer, fuel and repairs. Most farm operators will also likely have higher costs for operating interest in 2019, as compared to previous years, due to higher interest rates and increasing levels of farm operating debt. Production costs are highly variable from farm-to-farm, depending on fertility level, availability of livestock manure, and farm operator efficiency.
The tight cash flow margins in crop production for the 2019 crop year are causing concern for farm operators, as they negotiate land rental rates for the next year. The very tight, or even negative profit margins for next year’s crop, are also a concern for ag lenders, as they begin to re-finance crop producers for the 2019 crop year. Some farm operators will need to do some serious evaluation before agreeing to pay higher land rental rates for 2019, which could potentially lead to some large financial losses for their farm operation.
In many cases, landlords have lowered land rental rates in the past few years, due to the lower commodity prices and tighter cash flow margins. Now landlords are wondering if they need to make further adjustments in land rental rates, especially considering the fact that real estate taxes on farm land are quite high in some areas. Demand for rented farm land has remained very strong in some areas; however, that demand has started temper a bit for rented land at higher land rental rates, due to the continued low commodity prices. Serious and honest negotiation between farm operators and landlords will be required to arrive at equitable rental rates for 2019 and beyond.
An alternative for farm operators and landlords to consider for 2019 may be to enter into a “flexible cash rent agreement”, which sets a reasonable “base rental rate” that is based on average crop yields, typical production costs, and projected 2019 prices. A “flexible lease” would have provisions to increase the final annual rental rate in the event of exceptional crop yields and/or higher than anticipated crop prices in 2019. These final cash rent adjustments should be based on actual crop yields and/or crop market prices in the Fall of 2019, with any rental rate adjustments occurring on the final land rental payment for the year. If the “base rental rate” is set higher than realistic breakeven levels for the farm operator, the flexible lease will not be very effective to address the added financial risk.
Kent Thiesse, Farm Management Analyst, has prepared an updated Information Sheet titled: “Flexible Lease Agreements for 2019”. To receive a free copy of this Information sheet and other land rental information, contact Kent Thiesse at: kent.thiesse@minnstarbank.com
Iowa State University has some very good resources on flexible cash leases and written cash rental lease contracts, including sample cash rental contracts, which are available on their “Ag Decision Maker” web site, which is located at: http://www.extension.iastate.edu/agdm/. University of Minnesota Extension has scheduled a series of land rental informational meetings for landlords and farm operators scheduled in December. To get a complete listing of the dates, times, and locations of those meetings, please go to the following web site:
https://extension.umn.edu/courses-and-events/farmland-rental-workshop
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Note — For additional information contact Kent Thiesse, Farm Management Analyst and Senior
Vice President, MinnStar Bank, Lake Crystal, MN. (Phone — (507) 381-7960);
E-mail — kent.thiesse@minnstarbank.com)