Tips on Negotiating Land Rent
With a new production year about to unfold, it’s a good time to take a closer look at crop input costs and see how these might be restructured in order to bring a more positive outcome to year-end profitability.
Standing front and center in most farmers’ economic picture is, of course, the cost of land rent. “It’s easily the biggest expense that farmers are trying to manage,” says Dale Nordquist, associate director of the University of Minnesota’s Center for Farm Financial Management. “Most producers we work with rent more than 50% of their land. It’s not unusual for larger crop producers to rent as much as 70% to 80% of their land. These farmers work with a lot of different landowners.
“We see a tremendous variation in the rental rates that farmers are paying,” he says. “With present economic conditions, it’s hard to find a profit in most of these rates, though.”
Scaling land rents back to a potentially profitable level requires negotiation with landowners, naturally. Both opportunity and risk are inherent in the process. A lowering of the rate would, of course, be a positive outcome for the producer. Yet, the negotiation process could also result in the producer’s loss of the land.
Nordquist encourages looking to your bottom line for insight about what’s at stake for you personally. “Producers can’t continue to lose money at the rate at which they have been losing money,” he says. “In 2015, the average crop producer in Minnesota only made $27,000 from the whole farm. That doesn’t feed a family, and 50% of farmers made even less than that.”
Stalling rate negotiations by looking for rebounding crop prices to provide relief from the cost price squeeze is uncertain, at best.
“We have no idea how long prices are going to be depressed,” says Nordquist. “It’s going to take a correction problem in yield in some part of the country. We’ve had two big crops on the market in the last two years. Something will change. When? I don’t know. Where that production correction eventually hits is critical.”
Considering the possibility of letting some rented land go could be a practical option to cut excess losses. “If the present economic circumstances are going to last much longer,” says Nordquist, “some producers might be better off to let some land go, especially if they have other means of replacing whatever income there might have been from that land.”
Yet, for many, downsizing a land base could hinder future production potential. Downsizing has the drawback, too, of diminishing the economies of scale that help spread overhead costs more efficiently.
If retaining rented land and containing costs are together on the table for your operation, then Nordquist encourages sharpening your skills of negotiating with landowners.
5 Points To Consider
- Fair rent is relative to individuals affected. “Recognize that there really is no such thing as a fair rental rate,” says Nordquist. “The producer and landowner typically have differing rates each thinks is fair. The goal should be to arrive at a negotiated rate that farmers can afford to pay and that landowners can accept.”
- Costs to cover. When calculating a restructured rate to present to landowners, all input costs and projected yields provide the backdrop. “I also encourage producers to include an opportunity cost of $35 to $50 an acre to cover time and management,” says Nordquist.
- The background of the landowner. Negotiating a reduced rate in rent boils down to finding ways to communicate that inspire landowners to share some of the risk that is historically embodied in agriculture. It might go without saying that anyone involved in farming – whether producer or landowner – must be a risk-taker at heart. Landowners with firsthand experience as producers understand this. “A lot of landowners are second- or third-generation owners who don’t have a close relationship with the land and don’t understand the forces at play,” says Nordquist. “It can be particularly difficult when families are involved in the ownership, and siblings, for instance, expect a significant return from the land.”
- Preparation of information for meeting or speaking with a landowner. The content of your informational package might be determined by the landowner’s background, level of vested interest in the land, and understanding of the economic issues involved. “Provide the landowner with anything that documents your story,” says Nordquist. “It could be helpful to provide information about yields and the positive or negative net return generated in the past year. You might even share yield maps from various fields.”
- Opportunities in flex leases. These are written agreements between producer and landowner that add flexibility to cash rental rates. The year-end rate can flex according to changes in price and yield. A flex lease may reduce gross revenue for the producer in years of windfall yields and prices, but it also offers a way for both producer and landowner to share risk. “Landowners typically would like to receive a base rent paid up front in the spring,” says Nordquist. “The second half paid in the fall would be the amount that flexes. Some landowners are very receptive to these kinds of arrangements and are willing to support their renters by giving them flexibility.”
Figure An Equitable Rate
The FairRent app developed by the University of Minnesota’s Center for Farm Financial Management (CFFM) helps you evaluate the feasibility of crop-rental arrangements. By inputting budgets for crop production, you can determine a break-even rental rate at various yields and prices for different rental arrangements.
The app evaluates cash, share, and flexible rental agreements. By inputting prices and yields into the FairRent app, you can look at rate structures that flex with price and yield, either solely or in combination with each other.
“You might also develop a lease agreement that flexes with gross revenue,” says Dale Nordquist, CFFM associate director. “The landowner could receive a percentage of gross revenue calculated at harvest, though a base rent could be paid in spring. There are lots of different ways you could set this up.”