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Caution advised on high land rental rates

Cash corn and soybean prices have dropped significantly in the past few months, and the projected forward prices for fall 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 2015 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 2014. Some 2015 land rental rates may be set at levels that do not offer much opportunity for profit potential from crop production in 2015, or could even result in a significant net loss to the farm operator.

Cash corn prices in southern Minnesota are currently near $3.30 per bushel, and cash soybean prices are near $10.00 per bushel. The comparable new-crop prices for fall 2015 are almost at the same level for corn and soybeans. By comparison, in mid-November of 2013, the 2014 new-crop prices were estimated at about $4.15 per bushel for corn and $12.50 per bushel for soybeans. In 2012, the mid-November local new-crop prices for 2013 were near $5.80 per bushel for corn and $14.00 per bushel for soybeans. The USDA Farm Service Agency (FSA) in southern Minnesota is recommending that ag lenders use local crop prices for 2015 of $3.50 per bushel for corn and $9.00 per bushel for soybeans when doing financial analysis for FSA guaranteed loans.

Average crop input expenses for corn and soybean production in southern Minnesota, excluding land costs, rose about 20-30% from 2011 to 2013, primarily due to increases in seed and fertilizer costs. Fertilizer costs declined slightly in 2014, while most other input costs were about steady from the previous year. Total cash expenses for corn production are not expected to decrease significantly for the 2015 crop year. 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 2015, or when bidding on rental rates for new crop land. Following are some things to consider:

  • Crop insurance guarantees for 2015 are likely to be considerably lower than in 2014, 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 $4.62 per bushel, with an 80% revenue protection crop insurance policy, had a crop insurance guarantee of $702.24 per acre in 2014. The current estimate for a corn crop insurance base price in 2015 is near $3.50 per bushel, which would result in an insurance guarantee of only $532.00 per acre for next year, with the same APH yield and insurance coverage level as in 2014.
  • Farm operators should assess the risk potential of high-dollar land rental rates before finalizing a 2015 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 breakeven 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 2015 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 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 2015 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/or market prices in 2015, 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.  
  • Farm operators should make sure 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 communication between a farm operator and a landlord is always a main key to avoid problems, and to 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 ([email protected]).

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