Farm Horizons, February 2018

Looking at land rent rates

By Gabe Licht

With many farmers aging and retiring, farms are growing larger, and more farmers are renting farmland than in previous years.

“Knowing trends, there’s more absentee landowners and more renting going on,” said Rod Greder, an educator with the University of Minnesota Extension. “In the past five years, land prices got to be unsustainable to buy a piece of property and think you’re going to pay it off. I don’t have hard numbers, but I’m pretty sure more land is being rented now than has been.”

“As the age of our farmer demographic increases, farms are being passed down,” Greder continued. “Children aren’t going to farm it and are looking for renters. Farm size continues to increase. There’s no doubt about that. Most of that is through renting adjacent land.”

Fittingly, many are asking, “What are fair land rental rates?”

That question was the center of a Dec. 4 meeting in Buffalo, one of 45 meetings Extension hosts throughout the state each year.

Part of answering that question is looking at average land rent rates.

Per the Farm Financial Management Database known as FINBIN, the Wright County average was $149 in 2014, $144 in 2015, and $154 in 2016. Per the United States Department of Agriculture’s National Agriculture Statistics Service, known as NASS, the Wright County average was $159 in 2017.

Nearby counties have much higher land rent rates.

Carver County’s average was $214 in 2014, dropped to $173 in 2015, rebounded to $202 in 2016, and settled at $189 in 2017, according to data from FINBIN and NASS.

McLeod County’s average was $233 in 2014, $205 in 2015, $188 in 2016, and $223 in 2017.

Meeker County’s average was $191 in 2014, $183 in 2015, $176 in 2016, and $175 in 2017.

What is expected to happen in 2018?

“I would say our agricultural business management experts within Extension are saying 2018-19 rental rates are probably going to stay flat or come down just a bit because the break-even numbers for corn and soybeans are fairly low, and the commodity prices and average yields aren’t going down any,” Greder said. “ . . . Using financial ratios, land rent should be down because commodity prices are down. Demand is still because people think the (commodity) prices are going to get there, but the numbers may not support that.”

How did land rent rates get to where they are? Greder provided a brief history lesson.

“Back to 2011-12 is the most relevant time period because that’s when we’ve seen the biggest changes in commodity prices,” Greder said. “From 2010 to 2012, when we had corn at $7 per bushel and soybeans at $13-14 per bushel, land rental prices ran up in 2011, 2012, and 2013 to meet higher commodity prices.”

Over the past five years, commodity prices have dropped by about 50 percent for corn and 30 percent for soybeans, but land rent prices are only down 10 to 15 percent over the same time period, Greder said, leading farmers and tenants wondering why.

“The answer to that, as far as we can determine, is supply and demand,” Greder said. “There are still farmers looking for land and neighbors who want to expand operations. People are optimistic that prices will rebound.”

Landowners on the high end of the spectrum have gotten accustomed to $200 per acre over the past three or four years, Greder said.

“They don’t want to give that up, even though economics don’t show that’s sustainable,” Greder said. “It always goes up faster than it goes down. It’s not going down fast enough according to renters and farmers.”

Land rents can span a wide range. For example, the lowest 10 percent of land rates in Wright County were $43 or less in 2016, while the highest 10 percent of land rates were $200 or more. Those numbers were $96 and $255 in Carver County, $79 and $289 in McLeod County, and $100 and $230 in Meeker County.

There is a plethora of reasons for that disparity.

“The range can be from $40 to $220 in Wright County based on productivity, irrigation, size, how far people have to drive, and – most importantly – whether that relationship between the tenant and landowner is arms-length or a relative, for example.”

When it comes to the cheapest properties, oftentimes someone is renting to a relative or neighbor and simply hasn’t adjusted the price for many years. For some, the fact that a tenant is paying on time and taking care of the land is enough of an incentive to keep the price flat.

On the other end of the spectrum, “an absentee landowner from the cities wants to get the maximum amount and puts it out for open bidding . . . Those on the higher end of $200 to $220 have probably been tough negotiations.”

Greder also addressed the disparity between land rent rates in Wright, Carver, McLeod, and Meeker counties.

“McLeod and Meeker have a little more traditional agricultural land, which matches up with western Wright County,” Greder said. “ . . . In central Wright County, land rent trends up because of the proximity to the metro. They’re willing to pay more because of the lifestyle and hobby. Eastern Wright County tracks better than west Hennepin County.”

Even marginal land in Wright County is in demand because people want land in close proximity to the Twin Cities.

“There’s definitely a geographic component to the equation,” Greder said.

Regardless of the location, there are alternatives to the traditional land rent arrangement.

Options include crop-sharing, yield-sharing, and other arrangements that allow both parties to hedge risks.

“If a landlord wants $200 an acre, if there’s an environmental catastrophe, maybe it should be reflected in the final payment,” Greder said as an example of an innovative lease.

The vast majority of landowners, especially absentee landowners, want to “keep it simple,” Greder said.

However, his office has been fielding calls about alternatives.

“I can’t say I have data to say we’re seeing more flexible leases, but I’m certainly getting more questions about it,” Greder said. “Extension probably needs to do more training . . . They know it exists, but don’t really know how it might work, so they stick to the status quo.”

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