Farmland Leasing –
Negotiating Land Rents
2013 Groundbreakers Conference
Dennis Schmidt
Accredited Farm Manager
Upper Midwest Management
New Ulm, Minnesota
507-233-5776
[email protected]
www.landspecialists.com
Key Points Regarding Leasing
Basic information on leases
 Types of lease arrangements
 Flexible lease arrangements
 Know your costs of production
 Building relationships with your landlords
 Evaluating a tract of land
 Rent more land versus improving what
you have

Leases in General

A lease is an agreement that gives
someone the ability to use or possess real
or personal property for a designated
period of time in return for some type of
payment.
◦ Does not transfer title, ownership or give an
equity interest in the property
History of Leases

Farm leases in the past
◦ Most were just an oral agreement

Farm leases in the present
◦ Written leases –
It is important that they
spell out all the terms of
the agreement
Elements of a Lease

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


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Creates a valid contract
Sets the terms for the length of the lease
Provisions for payment for the use of the
land
The transfer of substantial rights to the
tenant
Possession and control of the property by
the tenant while under lease
Upon concluding the lease, the interest
reverts back to the landlord
General Terms Common in Leases
Time Period and Termination
 Amendments
 Transfer of Property
 Right of Re-entry
 Sublease
 Binding on Heirs

Agricultural Liens

Minnesota law provides special protection
for agricultural landlords by giving them a
lien for rent upon crops grown or
growing on the leased property and their
proceeds.
◦ The landlord must file a financing statement at
the county recorder’s office within 30 days
after the crops are planted.
◦ A “perfected” landlord’s lien has priority over
all other liens or security interests in the crop.
Types of Lease Arrangements

Typically can be classified as Cash lease or
Crop Share
◦ Share rent
◦ Cash rent
 Bushel rent
 Set bushels per acre
 % of bushels
◦ Flexible lease rent
Crop Share Lease

Looking back in history this was the most
common method of renting land
◦ Landlord and tenant received a
predetermined percentage of the crop based
on their contributions
 Typically the land was the contribution of the
landowner
 The tenants contribution was labor and input costs
Changes Over Time

The old crop share was 1/3 to the
landlord with no production costs and
2/3 to the tenant who provided all the
machinery, labor, and production costs.

This evolved to 1/2 landlord, 1/2 tenant,
with production costs shared equally.
Disappearance of the Crop Share

Complexity of administering
 Farmers began to farm more acres
 Multiple owners

Farmers drove up rental rates thus
landowners found cash rent more
enticing.
USDA’s Agricultural Resource
Management Survey (ARMS)

The 2011 survey indicates that farmers
◦ Own 59% of the land they operate
◦ Lease 35% with cash payments
◦ Lease 6% on a crop share arrangement
Cash Rent Leases

Rates have increased dramatically these
past years
◦ Greater demand for our commodities has
elevated crop prices
◦ Competition is strong as farmers have strong
balance sheets
◦ Rental rates have lagged in comparison to
land values

Payment terms are shifting
◦ From half spring - half fall to all up front
Cash Rent Leases
 BIG question:
“How do you determine what that
rental rate will be???”
Determining Rental Rate

What others are charging/paying
As heard at the local coffee shop – Coffee shop rental rates!!!
“If my neighbor can get that kind of rent I should be able to
charge that too…”
Owners forget about the variability in tracts of land
due to primarily soils types, fertility, and drainage.
Unfortunately, we see too often that this is the
primary way rental rates are being determined.
Where do we get Rental Rate
Information?

Many farmers or land owners don’t want
to share this information
◦ University of Minnesota land rent survey
 No longer being published due to lack of responses
◦ County data
 Are enough land owners responding to make this
reliable information?
Historical Look at Rental Rates in
Comparison to Gross Revenue

Cash rental rates tend to follow the gross
revenue generated from the crop being
produced.
◦ What are your guesses?
 Corn
 Soybeans
_______ % of the Gross Revenue
_______ % of the Gross Revenue
Average Iowa Cash Rent
Return on Investment

Historical return on good farmland may be
in that 3-4% range

Land Value Range
◦ $8,000
◦ $9,000
◦ $10,000
Rental Rate
$240-320
$270-360
$300-400
If not a share crop arrangement
or cash rent what other options
are there?
How About a Flexible Cash Rent
Lease?

Ways that flex leases can be structured
◦
◦
◦
◦
◦
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Rent based on % of gross revenue
Base rent plus a bonus
Based on yield only
Based on price only
Based on yield and price
Based on percentage of crop only
 Landowners must consider insuring his share
◦ Flex based on federal crop data
Percentage of the Gross Crop Value

Consider the difference between gross
crop value and gross crop revenue

Reference the Iowa State data – page 8

Use the most recent averages
◦ Corn - 24%
◦ Soybeans - 35%
Flexible Farm Lease Agreements
Example 1 – Corn
Cash rent will be equal to 25 percent of the gross crop
revenue.
The actual yield of corn is 150 bushels per acre, and the
actual price is $6 per bushel.
USDA direct payment is equal to $20 per acre.
The gross income is equal to (150 x $6) + $20 = $920.
The cash rent is equal to (25% x $920), or $230 per acre.
Base Rent Plus a Bonus

Make sure your formula is spelled out
well
◦ Usually the base rent is a minimum and will
not go down
◦ Bonus – the owner receives a share of the
gross revenue in excess of a certain base
value
Example 2 – Soybeans
Base rent is $150 per acre.
Tenant’s cost of production is $260 per acre, excluding land.
Base gross revenue is $410 per acre ($150 + $260).
Bonus is 35% of the gross revenue in excess of $410 per acre.
Actual yield is 52 bushels of soybeans per acre and actual price is $13 per bushel.
USDA direct payment is equal to $20 per acre.
Gross Revenue is equal to (52 bu. x $13) + $20 = $696 per acre.
Revenue is excess of the base = $696 - $410 = $286.
Rent is equal to $150 plus 35% of $286,or $150 + $100 = $250.
However, if the market price of soybeans is only $9 per bushel, the gross revenue
would be only $488, the bonus would be ($488 - $410) x 35% = $27, and the
rent would be $177 per acre.
Flexing for Yield

Make sure the lease spells out how you
determine the total bushels
◦ Weight tickets
◦ Combine yield monitors
◦ Measuring grain stored in bins

A base yield needs to be determined
◦ Is it county average or farm average?
Flexing for Price

Again, make sure your lease spells out
how the price is determined
◦ Use a local elevator and designate several
specific days throughout the year to get an
average

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April 1
June 1
October 1
November 1
October delivery
October delivery
Cash
Cash
How does Crop Insurance Enter
Into Flex Leases?
The operator is covering his potential
loss with insurance
 Crop insurance revenue may need to be
included in looking at gross revenue
 Crop insurance can provide yield history
and help determine a price

Flex Lease Based on
Crop Insurance Data
Compare the two leases that follow:
 Base rent: $200
 Base Federal crop yield: 175 bu/ac
 Base Federal crop spring price: $5.68
Sale price calculated
Yields vary
One example: 185 bu/ac

◦
160 bu/ac
Thoughts on Flex Leases

Many land owners find flex leases
complicated. Requires more record
keeping.

Many land owners find straight cash rent
the easiest.
Let’s Switch our Line of Thinking

How do you determine what YOU can
pay for cash rent???
Know Your Costs of Production

Make sure you know your own costs of
production to determine what you can
pay and still make money.

Do enterprise analysis work
◦ Which crop has better returns?
 Corn
 Soybeans

Work out a breakeven cost for each crop
Estimated Crop Production Costs In Iowa
2004-2013
Prepared by Michael Duffy,
extension economist, Iowa State
Risk Management

Utilize tools available to protect yourself
Federal Crop Insurance-Revenue Insurance
Hail Insurance
Drought Insurance
Building Relationships with Your
Landlords

Communication is the key!!!
Is your landlord local or far away?
This can make a difference

What should you share?
Annual weather information
Soil Tests
Fertilizer applications
Yield maps - can show the need for tile
Evaluating a Tract of Land
Not all farms or fields are the same. Look at:
◦
◦
◦
◦
Soils maps
Drainage
Soil tests
Production history

Each tract of land should stand on its own!

Why farm more land if it doesn’t make you
money?
Take a closer look at these two tracts of adjoining land
to see how soil types can change.
West Quarter
East Quarter
West Quarter
79.2 PI
East Quarter
92 PI
Renting More Land Versus Improving
What You Have

Rather than renting more land what can
you do to get the most out of the land you
have?
Renting more land vs Improving the
land you presently farm.
Water Management
Drainage
Pattern tiling pays
dividends
•
Irrigation
Is it time to utilize irrigation
when needed?

bi
Integrated Farming System (IFS)

Monsanto is launching a new program
◦ This will key on fine tuning your operation
◦ Watch for this as it develops and take part if
you can
◦ You will need the most modern technology
 Grid soil samples
 Geo referencing
 Variable rate planting

Maximize your profit from every acre
Summary
Use a written lease and make sure all
items are completely spelled out.
 There’s no easy answer to determining
the rental rate!
 Does a flex arrangement work for you
and your land owner?
 Evaluate each tract of land on it’s own
merits
 Know your cost of production

REFERENCES:
Iowa State University
Extension Publications
Flexible Farm Lease Agreements, Ag Decision Maker, File C2-21, Revised July 2012
Computing a Cropland Cash Rental Rate, Ag Decision Maker, File C2-20, Revised July 2012
Estimated Costs of Crop Production in Iowa- 2013, Ag Decision Maker, File A1-20,
Revised Jan 2013
University of Minnesota
Extension Publications
Farm Leases, Farm Legal Series, June 2009
South Dakota State University Extension Publications
Flexible-Cash Lease Agreements, ExEx5067
Midwest Plan Service
Cash Farm Lease with Flexible Provisions, NCR-76, Revised 1997
North Central Farm Management Committee, NCFMEC-01, December 2011,
http://AgLease101.org
Dennis Schmidt, AFM
Denny Schmidt is presently a farm property manager for Upper Midwest
Management based in the corporate office in New Ulm, Minnesota. Denny
is the lead farm manager and works with other managers in New Ulm, as
well as managers in the Olivia, Minnesota, and Jamestown, Ohio offices.
Upper Midwest Management manages farm property for absentee
landowners. Denny is also a licensed Realtor and can help with the
acquisition and sales of farm property, as well.
Denny began his career with Upper Midwest Management in 1982. He manages farm property
in Minnesota and Iowa. In 1993 he attained the Accredited Farm Manager (AFM) designation
from the American Society of Farm Managers and Rural Appraisers (ASFMRA). Denny is active
in the Minnesota ASFMRA chapter having served as president in 1992. He will serve again in
2015. Denny has also served on the farm management committee at the national level.
Over the past years, Denny has served in numerous civic organizations, including chairperson of
the New Ulm Area Chamber of Commerce. His current agricultural commitments include being a
member of the Nicollet-Sibley County corn and soybean growers, Board member for the Nicollet
County Farm Bureau, and member of the New Ulm Farm-City Hub Club.
Denny is a native Minnesotan growing up on a farm near Gaylord, MN. He and his wife, JoAnn, who
teaches in the Sibley East School District, recently returned to his home farm site where they
reside and Denny actively farms part time. Denny is a 1974 graduate of the University of
Minnesota with a degree in Agricultural Education. After college Denny taught Vo-Ag in Goodhue,
MN, and New Ulm prior to beginning his career with Upper Midwest Management.
Denny’s commitment to the agricultural sector, as well as his vast knowledge, his desire to keep
current with the fast changing world of agriculture, and his many years of farm management
experience makes him a “turn to” professional in his field.
1314 Westridge Rd
New Ulm, MN 56073
(507)359-2004
www.landspecialists.com
Olivia Office
2510 Lincoln Ave W, Ste 4
Olivia, MN 56277
(320)523-1951
New Hope Office
4900 Hwy 169 N, Ste 100
New Hope, MN 55428
(763)535-4914
Ag Services
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Jamestown, OH 45335
(937)675-7511