A freeze on cropland rental rates?
It may seem obvious: Crop prices are poor, profit margins are tight and much of the Upper Midwest suffered through horrible harvest conditions in the fall of 2019. So area farmers naturally will pay less to rent cropland in 2020, right?
But that’s not what’s happening, area farmers, agricultural bankers, real estate agents and Extension officials say.
With most 2020-crop year negotiations completed, in progress or set to begin soon, rates generally are holding steady, ag officials say.
“There may be some localized areas (with particularly poor 2019 crop seasons) where rates will fall, but most (rates) will be stable,” says Nate Franzen, president of the Agri-Business Division of First Dakota National Bank in Yankton, S.D.
Bryon Parman, the North Dakota State University Extension agriculture finance specialist, agrees. “I don’t see them (rates) going up in the short term, but I don’t see them falling, either,” he says.
The same is true in Montana, said Kate Binzen Fuller, Montana State University assistant professor.
“Generally, rates continue to tick up marginally each year. The increase from last year just about keeps up with inflation, so we aren't seeing any real increase, but we aren't seeing a decline, either,” she said.
None of that should be a big surprise, given relevant federal statistics.
This summer, two reports from the U.S. Department of Agriculture’s National Agricultural Statistics Service, or NASS, found that North Dakota, South Dakota and Montana generally had higher average 2019 rental rates, although rates fell slightly in Minnesota from 2018 to 2019. The Minnesota decline apparently reflected, at least in part, difficult conditions for the dairy industry in a major dairy state.
Another consideration in Minnesota: Fewer farmers now are willing to pay very high rental rates, which pulls down the average rate, said Noah Hultgren, a Willmar, Minn., farmer and real estate broker.
“We’re not seeing as many of those high-end contracts that have you scratching your head about how they can pencil out (show a profit for the renter),” he said, a trend that appears to be true elsewhere in the area, too.
The NASS reports were based on numbers collected before the difficult 2019 harvest — which, at least for now, seems to be having little impact on new 2020 rental rates. Ag officials give a number of reasons for that, including:
Interest rates, already low, have fallen a bit lower. That reduces borrowing costs, which potentially gives farmers the ability to pay a little more to rent land than they otherwise could.
There’s an inherent connection between rental rates and land values, or the price for which land sells. Land values generally aren’t falling, so that helps to prop up rental rates.
Some farmers remain in relatively good financial shape, maintaining both demand to rent land and the ability to do so. Demand may not be strong as it was a few years ago, but it’s still there.
The so-called safety net has provided many hard-pressed farmers with income they otherwise wouldn’t have had. “Crop insurance and government payments have helped,” Franzen said.
Renting additional land can spread expenses over more acres, reducing per-acre production costs and potentially creating higher profits.
Farmers in general are becoming more efficient, thanks to improved tools and new research, helping them to pay rents that they otherwise might be unable or unwilling to pay.
Rental rates across much of the country soared during the 2008-2013 agricultural boom. Rates in the Upper Midwest generally rose much more modestly, making them less likely to decline now.
Not all area farmers suffered through a tough 2019 crop season. In Montana, Fuller said, farmers “had a great year for overall grain yield,” though bad weather hurt spring wheat and durum in the northeast part of the state.
And from the landlord’s perspective: Property taxes on area farmland overall have risen in recent years, making farmland owners less willing to accept lower rental rates and helping to hold up rates.
Typically, rental contracts are for one, two or three years. One-year contracts negotiated for the 2019 crop season, two-year contracts covering 2018 and 2019, and three-year contracts for 2017, 2018 and 2019 need to be renegotiated, or the land will be rented to another farmer.
Though firm numbers are hard to come by, it appears that one-year contracts may be more common than usual in 2020.
Given poor crop prices, still-muddy trade issues and the strong possibility of a late start to planting this spring, “There’s a lot of uncertainty (among farmers). That could cause them to be less willing to be tied to longer leases and lead to more interest in one-year leases,” Parman says.
Keep in mind that one-year leases are poorly suited to some situations. For example, sugar beets typically are grown in a multiyear rotation with other crops. So a farmer who plans to raise beets on rental land most likely will want a multiyear rental agreement.
The uncertainty also could lead to greater interest in so-called flexible leases, ag officials say.
Currently, cash rent — a fixed amount of money per acre paid by a renter/farmer — is the norm in area agriculture. Cash rent is easy to put into practice and offers a clear-cut, predetermined payment method that most landlords and tenants generally welcome.
In contrast, the once-popular but now rarely used crop shares give landlords a share of the crop rather than a fixed payments. That means more money for landlords in good years and lower payments by farmers in poor years.
“Crop shares are the fairest economically,” Parman says.
Flex rates combine features of crop shares and cash rent, often using a base or fixed payment, plus an additional payment if yields or crop prices, or both, are good.
Hultgren says that while there may be more interest than usual this winter in flex rents, he doesn’t think it will lead to a big increase in actual flex-rent agreements.
Mutual trust between farmer and landlord is crucial for flex rates to be implemented successfully, ag officials say.
Though every year, including this one, is different, 2020 rental rate negotiations play out against more than a decade of highs and lows in the area’s ag economy.
The 2008-13 ag boom brought strong crop prices and record farm prosperity. Not surprisingly, landlords asked for higher rent, which farmers generally were willing and able to pay. Rates continued to rise for several years after the boom ended, before leveling off.
In eastern North Dakota’s Cass County, for example, the average per-acre rental rate for nonirrigated cropland roughly doubled from 2008-15, rising from $67.50 to $128.50. The average rate has fluctuated slightly since then, standing at $124.90 in 2019, according to NASS statistics.
Many factors potentially could influence cropland rental rents in the longer run, ag officials say.
In general, farmland values have risen faster and higher than rental rates. That could leave room for the latter to rise, while the former hold steady in coming years, Parman said.
Ag officials say the return of high crop prices and improved farm profitability also could boost rental rates. As Franzen noted, farmers generally are becoming more productive, which will increase their ability and willingness to pay more for land when economic conditions are good
Continued poor crop prices, uncooperative weather, higher interest rates and trade concerns all hold the potential to bring down rental rates over time, ag officials say.
Tips on negotiations
Negotiating farmland rental rates can be complicated or contentious or both. Adding to the potential difficulty is the growing number of landowners with no direct ties to agriculture: they’ve inherited or purchased land, but lack first-hand farming knowledge that could smooth negotiations.
Whatever the situation, experts offer these tips and suggestions.
- If landlords don't have the skill, knowledge or desire to negotiate themselves, hiring a farm management company to handle the job is an option.
- Utilizing reliable, impartial statistics and expertise can be crucial. Veteran agricultural bankers and Extension officials are good places to start.
- Consider flexible rates, or ones that are adjusted to reflect crop prices or yields or both. Flex rates give landlords more money in good years and also allow farmers to pay less in bad years.
- The adage, “There are two sides to every story” applies here: Both the farmer’s side and the landlord’s side are important and need to be reflected in the final agreement. Neither party should get everything it wants.
- Economics may not be the only consideration. For example, a farmer who keeps a retired neighbor’s rural road open during the winter might get a reduced rate on cropland that the farmer rents from the neighbor.