By Dorinda Anderson

Home

E-Mail

Back

Prairie Grains is the official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain Growers Association,
South Dakota Wheat, Inc., and the Minnesota Barley Growers Association.

But what is a fair market rate, how do you determine what a fair amount is, and how do you go about asking the landowner to lower the rental price?

Land rental rates vary widely throughout the region, ranging from below $20 to upwards of $90 an acre in ND, says Dwight Aakre, NDSU extension farm economist. Several factors need to be considered when determining that rent. The economic landscape is one of them. If the land the tenant rents is in an area where there has been a poor crop for the past two or three years, there is a greater chance the rental price can be negotiated downward. Not so if you’ve had a string of good years.

How will the rental market for cropland be affected by crop prices 25% to 30% lower than a year ago? Historical trends suggest that rental rates might decline slightly, but it may take another year or two of financial stress before substantial declines in rental rates are seen, says Bill Lazarus, University of Minnesota extension economist.

Data from past years suggest that cash rents will adjust over time, but adjustments will be small compared to changes in profitability from year to year. Tenants’ expected net returns from future crops are probably the main factor determining how much they tend to bid, says Lazarus. Landowners’ expenses such as property taxes may also affect their willingness to compromise on rates in a given year, but if a widespread decline in crop prices and yields reduces the bidding willingness of all potential tenants, then landowners may have no choice but to reduce rates. The alternative of letting the land lie idle will not be very attractive in most cases.

Gene Krause, extension educator for Lake of the Woods County in northwest Minnesota, helped coordinate a survey of landowners and tenants based on the last three years, and both parties indicated a reduction in rent. But that reduction was only about $2 or $3 an acre on a 35-acre field.

"I think some of the reasons (for lower rent) is increased anticipation of CRP coming out of the program. This last year there were a number of landowners trying to rent out land that was previously in CRP, and they’re having a tough time finding producers to pick it up because it was a tough year for farmers." Many farmers don’t have the capital to farm more land, Krause says, and even if they did, they may feel that it would be difficult to take on more acres and farm it efficiently.

The $2 to $3 an acre drop in rent indicated in the survey is not carved in stone. "You need to look at all the factors around it," says Krause. Those factors not only include yield and price, but might also include market value, which is increasing slightly each year, and cropland supply and demand. Thus, while land rent in northwest Minnesota looks to be flat to slightly lower, some areas, such as the Red River Valley, are still seeing $50 to $70 an acre for sugarbeet land, and Krause says he doesn’t think much of a decrease will be seen on that land in 1999.

The areas that could see some lower rental rates are those further east in Northwest Minnesota where there is a heavier concentration of CRP land. Krause says some survey respondents said they would allow someone to farm their CRP land rent-free for two years. "They are choosing to do that to get it back in production," Krause says. Those landowners were getting $40 an acre while the land was in CRP, but prior to the contract period, they were getting $30 an acre to rent it out.

However, it is costing the tenant close to $100 an acre to get that land back into production, when the additional chemical and tillage costs are factored in. "So the farmer is taking the risk of working it up. It is a good deal for the landowner, too, because once the weeds start growing up no one wants to look at renting it," Krause says. "Both parties have to communicate."

Krause suggests that the landowner might want to look at sharing some of the production risk. One possibility is crop sharing on a one-third/two-thirds plan, where the landowner gets a percentage of the crop instead of rent.

Another possibility is using flexible rent options, like a base price on what the crop will yield, or a base price on the actual price of the crop. If the price is above the base price it is a bonus for the landowner, and if the price is below the base price the landowner won’t receive quite as much, Krause says. This isn’t a new concept. But the risk of locking in a price in the off-season when rent is negotiated, and the crop isn’t harvested until fall, may deter some.

Negotiating fair rent

Presenting solid information to the landowner when asking for a lower rent or a flexible plan might be the shortest route to actually working out a plan that works for both parties, Krause says.

If the tenant has good records and knows the costs to produce a bushel of wheat or barley, for example, he can present that information to the landowner so there are some actual numbers, in black and white. Says Krause: "I think it is good for the producer to be able to put down the costs and what they have into raising that commodity so they are forced to look at different viewpoints, strategies and savings so he can ask, ‘where can I reduce my costs?’"

Determining the break-even rental rate doesn’t have to be difficult. There are a couple of options available to help work through the numbers to determine what a fair rent is for the land that is being rented.

One of those options is the FairRent computer software program, which is available through the Center for Farm Financial Management at the U of M. FairRent calculates a break-even rental rate that a tenant would be able to pay after specifying crop production costs, crop yields and prices, says the U of M’s Lazarus.

The program will also take a tenant through a land rental decision-making process, including revenue projections, input analysis, overhead expense estimates and labor and management requirements. FairRent will show the maximum cash rent a tenant can afford to pay per acre. It will show the breakdown of returns over all costs, returns over just direct costs and returns to labor and management. It also gives "what if" comparisons: an analysis of rent sensitivity based on variations in prices and yields and comparisons between cash and share rent.

FairRent (and other farm management software programs) can be purchased by contacting the Center of Farm Financial Management, University of Minnesota, 1994 Buford Ave., St. Paul, Minn. 55108; 612-625-1964 or 800-234-1111. E-mail: cffm@cffm.agecon.umn.edu.Web: www. cffm.umn.edu. Computer requirements include IBM or a 100% compatible PC with DOS 3.3 or higher, Windows 3.1 or Windows 95, with a minimum 640-KB memory. The software is $95, (Minnesota residents add $6.65 sales tax), the cost of which might be shared with a neighbor or two. It may even be accessible through your county extension office or local library.

Krause says FairRent is pretty self-explanatory and easy to run. One non-computer option that may help is a crop budget sheet available at most county extension offices that shows an average of what producers’ expenses have been over the last 10 years. Farmers can put their own numbers into the worksheet and determine what their actual costs are and what is left to pay rent. "That is a great starting point," Krause says.

Fair rent for storage, farm facilities

Sometimes farmers need to rent buildings to store grain or machinery. But what’s a fair price?

Gene Krause, extension educator for Lake of the Woods County in Minnesota, says a survey recently completed by his office of landowners and tenants indicated that storage buildings were often included in land rental rates. In some cases there were no buildings on the land, but no change in the rental value. Krause says he often sees storage rental rates of 1 to 3 cents per bushel per month.

"People are looking for storage for grain and machinery," Krause says. Twenty-five to 50 cents per square foot is cheaper than building their own facility. They probably only need that extra grain bin maybe once every five years."

Rental rates, however, will vary some depending on the type and condition of the facility, Krause said. The following is a list of suggested rates based on various uses and conditions of facilities.

Grain storage: It should have aeration and the capability to cool grain down in the fall and warm it up in the spring. It should also keep grain in good condition. Old: Smaller, high labor requirements and larger grain losses – 1 to 1½ cents per bushel per month and 8 to 12 cents minimum per year. New: Larger, good elevator grain movement system and small amount of grain loss – 1½ to 3 cents per bushel per month and 12 to 20 cents minimum per year.

Corn silage: Old: $1 per ton. Average: $1.75 per ton. New: $1.50-$3 per ton.

Machine shed: Old: Smaller, low ceiling, small doors and dirt floor — .15-.25 cents per square foot per year. New: Larger, high ceiling, large doors and cement floor — .25-.50 cents per square foot per year.

Facilities: Old: 6-8% of original investment. New: 8-12% of original investment. Renter pays all utility costs incurred plus minor building repair and equipment and maintenance costs. Owner pays real estate taxes, fire and wind insurance, building remodeling costs and replacement costs of barn cleaners, silo unloaders and livestock equipment. Both carry their own farm liability insurance.

House: Small poorly insulated, long way from major town — $200-$300 per month. Larger, well insulated, good location — $300-$500 per month.

Feeder cattle facilities: Range: $3-$7 per head per month, $5-$30 per head finished, or .03-.30 cents per head per day.

Pasture rent: Northern Minnesota pasture rents range from $12 to $30 per acre depending on pasture quality. If rented on a per day basis it equates to .10 to .30 cents per cow unit. The most common seems to fall around .21 cents per cow per day. The rate is adjusted for different livestock. For example, 3 to 6 month old calves are at 30%; 6 to 12 month old calves are at 50%; yearlings are at 75%; bulls or horses are at 125%; and ewes are at 20%.

Suggested rental rates for equipment are also available from county extension educators. The Minnesota Farm machinery Economic Cost Estimates are often based on per hour usage or per acre and vary widely.