Careful budgeting needed before renting land in 2014

By Dan Martens
University of Minnesota Extension

Kent Theisse is a former Extension Educator in Blue Earth County. He continues to do a lot of work on farm management issues as an employee of MinnStar Bank.

Kent wrote recently about factors people might consider as they work on 2014 crop production budgets and rental discussions.

Many factors play into rental discussions, including the past history of how people work out rental agreements in individual situations. Some people base this year’s rent on how things turned out last year. They are “kind-of” a year behind the trend in making adjustments the next year.

Most people work toward a balance that makes sense in their situation over time.

Keep in mind that anything can happen. Weather conditions, US farm policy, and decisions made in other countries could change things that push markets higher or lower.

Here are some points Kent wrote recently, looking at 2014:

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 from crop production in 2014, or could even result in a net loss to the farm operator.

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 considering rental rates and crop production budgets for 2014. 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 percent 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 before finalizing 2014 land rental rates on new or existing farm land. Use realistic crop yield and price projections, average costs of production for your own farm, including machinery and facility overhead expenses and a desired return to the farm operator. If the land rental rate is 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 are finalized for 2014 before paying for 2014 crop input costs for those acres, and before forward contracting a portion of the anticipated crop. It could be an expensive mistake, if the landlord suddenly chooses to cash rent the land to another farm operator for 2014, while the original farm operator prepaid the crop inputs and made forward contract marketing commitments for 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. 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.