Farmland Leasing Negotiating Land Rents 2013 Groundbreakers Conference

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1 Farmland Leasing Negotiating Land Rents 2013 Groundbreakers Conference Dennis Schmidt Accredited Farm Manager Upper Midwest Management New Ulm, Minnesota

2 Key Points Regarding Leasing Basic information on leases Types of lease arrangements Flexible lease arrangements Know your costs of production Building relationships with your landlords Evaluating a tract of land Rent more land versus improving what you have

3 Leases in General A lease is an agreement that gives someone the ability to use or possess real or personal property for a designated period of time in return for some type of payment. Does not transfer title, ownership or give an equity interest in the property

4 History of Leases Farm leases in the past Most were just an oral agreement Farm leases in the present Written leases It is important that they spell out all the terms of the agreement

5 Elements of a Lease Creates a valid contract Sets the terms for the length of the lease Provisions for payment for the use of the land The transfer of substantial rights to the tenant Possession and control of the property by the tenant while under lease Upon concluding the lease, the interest reverts back to the landlord

6 General Terms Common in Leases Time Period and Termination Amendments Transfer of Property Right of Re-entry Sublease Binding on Heirs

7 Agricultural Liens Minnesota law provides special protection for agricultural landlords by giving them a lien for rent upon crops grown or growing on the leased property and their proceeds. The landlord must file a financing statement at the county recorder s office within 30 days after the crops are planted. A perfected landlord s lien has priority over all other liens or security interests in the crop.

8 Types of Lease Arrangements Typically can be classified as Cash lease or Crop Share Share rent Cash rent Bushel rent Set bushels per acre % of bushels Flexible lease rent

9 Crop Share Lease Looking back in history this was the most common method of renting land Landlord and tenant received a predetermined percentage of the crop based on their contributions Typically the land was the contribution of the landowner The tenants contribution was labor and input costs

10 Changes Over Time The old crop share was 1/3 to the landlord with no production costs and 2/3 to the tenant who provided all the machinery, labor, and production costs. This evolved to 1/2 landlord, 1/2 tenant, with production costs shared equally.

11 Disappearance of the Crop Share Complexity of administering Farmers began to farm more acres Multiple owners Farmers drove up rental rates thus landowners found cash rent more enticing.

12 USDA s Agricultural Resource Management Survey (ARMS) The 2011 survey indicates that farmers Own 59% of the land they operate Lease 35% with cash payments Lease 6% on a crop share arrangement

13 Cash Rent Leases Rates have increased dramatically these past years Greater demand for our commodities has elevated crop prices Competition is strong as farmers have strong balance sheets Rental rates have lagged in comparison to land values Payment terms are shifting From half spring - half fall to all up front

14 Cash Rent Leases BIG question: How do you determine what that rental rate will be???

15 Determining Rental Rate What others are charging/paying As heard at the local coffee shop Coffee shop rental rates!!! If my neighbor can get that kind of rent I should be able to charge that too Owners forget about the variability in tracts of land due to primarily soils types, fertility, and drainage. Unfortunately, we see too often that this is the primary way rental rates are being determined.

16 Where do we get Rental Rate Information? Many farmers or land owners don t want to share this information University of Minnesota land rent survey No longer being published due to lack of responses County data Are enough land owners responding to make this reliable information?

17 Historical Look at Rental Rates in Comparison to Gross Revenue Cash rental rates tend to follow the gross revenue generated from the crop being produced. What are your guesses? Corn % of the Gross Revenue Soybeans % of the Gross Revenue

18 Average Iowa Cash Rent

19 Return on Investment Historical return on good farmland may be in that 3-4% range Land Value Range Rental Rate $8,000 $ $9,000 $ $10,000 $

20 If not a share crop arrangement or cash rent what other options are there?

21 How About a Flexible Cash Rent Lease? Ways that flex leases can be structured Rent based on % of gross revenue Base rent plus a bonus Based on yield only Based on price only Based on yield and price Based on percentage of crop only Landowners must consider insuring his share Flex based on federal crop data

22 Percentage of the Gross Crop Value Consider the difference between gross crop value and gross crop revenue Reference the Iowa State data page 8 Use the most recent averages Corn - 24% Soybeans - 35%

23 Flexible Farm Lease Agreements Example 1 Corn Cash rent will be equal to 25 percent of the gross crop revenue. The actual yield of corn is 150 bushels per acre, and the actual price is $6 per bushel. USDA direct payment is equal to $20 per acre. The gross income is equal to (150 x $6) + $20 = $920. The cash rent is equal to (25% x $920), or $230 per acre.

24 Base Rent Plus a Bonus Make sure your formula is spelled out well Usually the base rent is a minimum and will not go down Bonus the owner receives a share of the gross revenue in excess of a certain base value

25 Base rent is $150 per acre. Example 2 Soybeans Tenant s cost of production is $260 per acre, excluding land. Base gross revenue is $410 per acre ($150 + $260). Bonus is 35% of the gross revenue in excess of $410 per acre. Actual yield is 52 bushels of soybeans per acre and actual price is $13 per bushel. USDA direct payment is equal to $20 per acre. Gross Revenue is equal to (52 bu. x $13) + $20 = $696 per acre. Revenue is excess of the base = $696 - $410 = $286. Rent is equal to $150 plus 35% of $286,or $150 + $100 = $250. However, if the market price of soybeans is only $9 per bushel, the gross revenue would be only $488, the bonus would be ($488 - $410) x 35% = $27, and the rent would be $177 per acre.

26 Flexing for Yield Make sure the lease spells out how you determine the total bushels Weight tickets Combine yield monitors Measuring grain stored in bins A base yield needs to be determined Is it county average or farm average?

27 Flexing for Price Again, make sure your lease spells out how the price is determined Use a local elevator and designate several specific days throughout the year to get an average April 1 June 1 October 1 November 1 October delivery October delivery Cash Cash

28 How does Crop Insurance Enter Into Flex Leases? The operator is covering his potential loss with insurance Crop insurance revenue may need to be included in looking at gross revenue Crop insurance can provide yield history and help determine a price

29 Flex Lease Based on Crop Insurance Data Compare the two leases that follow: Base rent: $200 Base Federal crop yield: 175 bu/ac Base Federal crop spring price: $5.68 Sale price calculated Yields vary One example: 185 bu/ac 160 bu/ac

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32 Thoughts on Flex Leases Many land owners find flex leases complicated. Requires more record keeping. Many land owners find straight cash rent the easiest.

33 Let s Switch our Line of Thinking How do you determine what YOU can pay for cash rent???

34 Know Your Costs of Production Make sure you know your own costs of production to determine what you can pay and still make money. Do enterprise analysis work Which crop has better returns? Corn Soybeans Work out a breakeven cost for each crop

35 Estimated Crop Production Costs In Iowa Prepared by Michael Duffy, extension economist, Iowa State

36 Risk Management Utilize tools available to protect yourself Federal Crop Insurance-Revenue Insurance Hail Insurance Drought Insurance

37 Building Relationships with Your Landlords Communication is the key!!! Is your landlord local or far away? This can make a difference What should you share? Annual weather information Soil Tests Fertilizer applications Yield maps - can show the need for tile

38 Evaluating a Tract of Land Not all farms or fields are the same. Look at: Soils maps Drainage Soil tests Production history Each tract of land should stand on its own! Why farm more land if it doesn t make you money?

39 Take a closer look at these two tracts of adjoining land to see how soil types can change. West Quarter East Quarter

40 West Quarter 79.2 PI

41 East Quarter 92 PI

42 Renting More Land Versus Improving What You Have Rather than renting more land what can you do to get the most out of the land you have? Renting more land vs Improving the land you presently farm.

43 Water Management Drainage Pattern tiling pays dividends bi Irrigation Is it time to utilize irrigation when needed?

44 Integrated Farming System (IFS) Monsanto is launching a new program This will key on fine tuning your operation Watch for this as it develops and take part if you can You will need the most modern technology Grid soil samples Geo referencing Variable rate planting Maximize your profit from every acre

45 Summary Use a written lease and make sure all items are completely spelled out. There s no easy answer to determining the rental rate! Does a flex arrangement work for you and your land owner? Evaluate each tract of land on it s own merits Know your cost of production

46 REFERENCES: Iowa State University Extension Publications Flexible Farm Lease Agreements, Ag Decision Maker, File C2-21, Revised July 2012 Computing a Cropland Cash Rental Rate, Ag Decision Maker, File C2-20, Revised July 2012 Estimated Costs of Crop Production in Iowa- 2013, Ag Decision Maker, File A1-20, Revised Jan 2013 University of Minnesota Extension Publications Farm Leases, Farm Legal Series, June 2009 South Dakota State University Extension Publications Flexible-Cash Lease Agreements, ExEx5067 Midwest Plan Service Cash Farm Lease with Flexible Provisions, NCR-76, Revised 1997 North Central Farm Management Committee, NCFMEC-01, December 2011,

47 Dennis Schmidt, AFM Denny Schmidt is presently a farm property manager for Upper Midwest Management based in the corporate office in New Ulm, Minnesota. Denny is the lead farm manager and works with other managers in New Ulm, as well as managers in the Olivia, Minnesota, and Jamestown, Ohio offices. Upper Midwest Management manages farm property for absentee landowners. Denny is also a licensed Realtor and can help with the acquisition and sales of farm property, as well. Denny began his career with Upper Midwest Management in He manages farm property in Minnesota and Iowa. In 1993 he attained the Accredited Farm Manager (AFM) designation from the American Society of Farm Managers and Rural Appraisers (ASFMRA). Denny is active in the Minnesota ASFMRA chapter having served as president in He will serve again in Denny has also served on the farm management committee at the national level. Over the past years, Denny has served in numerous civic organizations, including chairperson of the New Ulm Area Chamber of Commerce. His current agricultural commitments include being a member of the Nicollet-Sibley County corn and soybean growers, Board member for the Nicollet County Farm Bureau, and member of the New Ulm Farm-City Hub Club. Denny is a native Minnesotan growing up on a farm near Gaylord, MN. He and his wife, JoAnn, who teaches in the Sibley East School District, recently returned to his home farm site where they reside and Denny actively farms part time. Denny is a 1974 graduate of the University of Minnesota with a degree in Agricultural Education. After college Denny taught Vo-Ag in Goodhue, MN, and New Ulm prior to beginning his career with Upper Midwest Management. Denny s commitment to the agricultural sector, as well as his vast knowledge, his desire to keep current with the fast changing world of agriculture, and his many years of farm management experience makes him a turn to professional in his field.

48 1314 Westridge Rd New Ulm, MN (507) Olivia Office 2510 Lincoln Ave W, Ste 4 Olivia, MN (320) New Hope Office 4900 Hwy 169 N, Ste 100 New Hope, MN (763) Ag Services 7165 US Route 35E Jamestown, OH (937)