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Create a fair rental agreement for both parties

Agrivision: Finding a land rent rate that satisfies both sides will take communication.

February 7, 2024

8 Min Read
rows of corn
DEAL OR NO DEAL: When negotiating land rent, to avoid any misunderstandings, offers should be finalized in writing and signed by each person. FARM PROGRESS

My son and I graze 240 beef cows in western Wisconsin. We sell the bulls as yearlings. In winter, the cows are housed in loafing sheds and fed baled hay and corn. We have 200 acres of pasture and 200 acres of hay and corn ground. We had a good year last year. We kept an extra 25 heifers last summer and are expanding our herd a bit. The neighbor sold his dairy cows last fall and asked if we want to rent 100 acres of pasture and 150 acres of cropland this spring. We could use the land and the feed. The land yields 175-bushel corn. His fences need some work, but he has good access to water on the pasture. He asked me to make an offer on land and pasture rent. If we do this, we want to pay a fair price. What are your thoughts?

Tom Kestell: Congratulations on the opportunity to expand your operation. Pasture rents are a locally driven market, while row crop rents are more of a standard pricing but also driven by local demand. The most important person to please is, of course, the landowner.

For the pastureland, he may be more interested in finding a good caretaker than getting the highest return per acre. Communicate your planned use of the land, and seek his input and suggestions about the proper care of his valuable asset. Next, discuss your plans for operating his cropland. Lay out a strategy to enhance the value of his land by using proper rotation, fertilization and sound conservation practices.

I’m sure you can come up with a workable plan that satisfies both parties. Remember that long-term working relationships are always with both sides thinking they are getting the clean end of the stick. Both parties working together can create a win-win situation.

Finally, your desire to have a fair agreement comes down to perception. The only two people who have to agree are the landowner and you. This reminds me of the old adage “Beauty is in the eye of the beholder.” My advice is to meet with the landowner and develop a mutual plan together that is fair to both of you.

Sam Miller: The beef business has been pretty good the past couple of years, and it sounds like you are well positioned to expand a bit. I suggest contacting some local agronomists to get an idea of the market rate for both farmland and pasture. The Wisconsin Ag Statistics Service also publishes an annual average rental rate for both farmland and pasture by county each August. Once you have researched rent ranges, contact your neighbor to work out a rate. Be certain to include responsibilities for fertility and fences, and who is paying these costs or if you will share them. Finally, put the agreement in writing for peace of mind for both you and your neighbor. Good luck with growing your business.

Katie Wantoch: Negotiating is important for the success of any business. It may seem like common sense, but many times people let their emotions get the best of them and ignore their basic instincts. It takes homework, discipline and street smarts to successfully make a deal. Some things to consider when approaching your neighbor on this land rental:

Prepare in advance. Research current land rental rates in your area.

Have a plan. What is your goal? What will you ask for? What would be an acceptable outcome? What are you prepared to walk away with? What might you need to walk away from?

Have confidence. Talk about the specific farming practices you will use on the farmland or your plan to maintain soil nutrient levels. Be sure that you have information prepared so you can share it and highlight the qualities you will provide.

Find a win-win to close the deal. Keep notes to ensure everyone is on the same page. Finally, to avoid any misunderstandings, offers should be finalized in writing and signed by each person. Good luck!

Helping the next generation

My wife and I are 61 and 62 years old. We have farmed for 40 years, and now we want to start transitioning our 300-acre farm to our son and his wife, who are 33 years old. Our son owns the 100-cow dairy herd, plus young stock and machinery. How do we figure out how to make the farm affordable to them and not saddle them with too much debt? We were waiting until milk prices went up, but that doesn’t look like it is happening anytime soon. We owe about $190,000 on our mortgage. Our son owes about $175,000 to the bank for his cows and machinery. We both live in recently remodeled houses on the farm. We plan to continue helping them on the farm for another six to 10 years, depending on our health. Please advise.

Tom Kestell: Congratulations on your successful career so far and on your success working with your son and his wife. Now comes the hard part — transitioning the ownership of the dairy farm from one generation to the next. At this point, a few questions need to be answered. Is your son your only heir? Does he have children? Does your daughter-in-law work on the farm full time? Will the farm have to supply the next generation with all their income, or will some come from off-farm sources?

I’m glad you are starting early to plan for the transition, because this gives you more options and time to explore the possibilities. This is also a good time to evaluate where each generation is financially. What are each generation’s assets versus liabilities, and how will liabilities be serviced and assets be protected? I’m sure after 40 years of farming you realize how difficult it is to pay off mortgages and that the farm only has so much extra cash to do so. Are you comfortable leaving your equity in the family farm? I am quite certain of one thing — very few of us will be able to take our assets to the afterlife.

Look into ways to protect your assets and your son’s from long-term care needs and other unforeseen catastrophic financial burdens that old age can drop on you. I would definitely talk to a trusted financial adviser who specializes in transition planning, and map out a path forward that meets everyone’s needs now and in the future. Always remember that failing to plan is akin to planning to fail.

Sam Miller: Transitioning the farm has a couple of meanings. I believe you mean the real estate, as the cattle and machinery have already been transitioned to your son and daughter-in-law. You do not mention if you have other children. If you do, this transition may be more complicated.

I would not suggest a cash sale to your son, as this would likely create a large capital gain tax for you and your spouse and likely too much financial leverage for your son and his wife. Another option is to sell to them on a land contract, which would provide you income and reduce the financial burden for the next generation. Yet another option is to rent the buildings and land with the option to buy. A final option is to provide for the farm to transfer via your wills while renting to them in the meantime.

Visit your tax professional and an estate attorney to understand the tax and other options available. When you have these options in hand and you and your wife are in agreement with what works for you, sit down with your son and his wife to discuss the options. It may take a few meetings and discussions to finalize a plan, so prepare for adequate time for a resolution.

Katie Wantoch: It sounds like you have taken great strides to start your farm succession. You’ve laid out the groundwork and now need a strategy for making a successful transition. One of the most important steps in the succession planning process is conducting a financial analysis. This helps both generations understand the farm’s past financial position and performance and will assist you in determining income expectations for both generations from the farm business. The first step is to gather what financial information you currently have, determine if it is appropriate for the financial analysis you want to conduct, and then start filling in the gaps. Having more than one year’s worth of information will provide some context about the state of the farm business and help construct its “story.”

You’ll be able to point out the years of expansion, the years of high income, struggles during the years of drought and other events that impacted the farm financially. Understanding your farm business’s history of financial position and financial performance will provide a basis to make decisions and plan for the future, such as completing pro forma financial statements. “Pro forma” refers to the future view of the farm’s financial position and performance and can be analyzed to determine what might be feasible and profitable for all generations. Reach out to your banker or a consultant to assist with your financial analysis.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, retired managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, University of Wisconsin Extension farm management outreach specialist. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].

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