Once harvest is completed in any given year, farm operators and non-farm landowners begin the tenuous task of negotiating annual land rental rates for the following crop year. Approximately 60-70 percent of the crop land in the Upper Midwest is under a land rental agreement, and most rental agreements are negotiated on an annual basis. There are some two or three-year leases in existence, which are more common in rental agreements among family members. Arriving at equitable land rental rates for the 2020 crop year is even more of a challenge, given the variable crop yields in 2019 and continued low grain market prices, as well as uncertainty surrounding trade negotiations.
In the past, many land rental arrangements have been between farmers and landlords that know each other quite well, sometimes being neighbors or family members. However, in recent years, more and more land ownership has been transferred to family members or family trusts outside of the local area. Some landowners are hiring the services of a land management company to represent them in land rental negotiations. Many times, farmers have had very limited working relationships with newer landlords or those representing landowners. This can lead to even more challenges when negotiating annual land rental rates.
Farmers in the Upper Midwest are indicating mixed crop production results in 2019. Some are reporting near average corn and soybean yields, while others have had some of their lowest crop yields in the past two decades, many for the second year in a row. Some in southern Minnesota and northern Iowa had corn yields that were up to 20 percent above their 10-year crop insurance actual production history in 2016 and 2017, only to be followed by 20 percent or more below average yields in 2018 and 2019. This shows why it is best to use the updated 10-year yields or other historical yield data to make yield projections for cash rental rates.
Cash corn prices have remained fairly low for four years, although there have been some recent signs of slight improvement because the poor crop yields. Soybean prices have remained fairly low following the Chinese tariffs on U.S. imports in mid-year of 2018. U.S. soybean exports to China have been only a fraction of what they were prior to the trade war. Up until 2018, China had been importing about one-third of the U.S. soybean production each year. The estimated U.S. soybean carryover at the end of the 2018-19 marketing year (Aug. 31, 2019) was more than 900 million bushels, a record.
The USDA says the average soybean price this year is $9.00 per bushel, compared to $8.48 per bushel for last year. The national average corn price is $3.85 per bushel, compared to $3.61 last year. Even though there is some current strength in local grain markets, forward price bids for the fall of 2020 are much lower. Southern Minnesota prices for the fall of 2020 are $3.30-$3.40 per bushel for corn and $8.30-$8.40 per bushel for soybeans, with even lower prices in western Minnesota and the Dakotas.
It is probably not realistic to base 2020 cash rental rates on projected prices of near $4.00 per bushel for corn and $9.00 per bushel for soybeans.
Average crop input expenses for crop production in southern Minnesota, excluding land costs, declined somewhat in 2017 and 2018; however, expense estimates were a bit higher for 2019, especially for fertilizer, fuel, repairs and harvest costs. Most farmers will likely have similar operating expenses for 2020. Production costs are highly variable from farm-to-farm, depending on fertility level, availability of livestock manure, and farm operator efficiency.
The tight cash flow margins in crop production are causing concern for farmers. The very tight, or even negative profit margins for next year’s crop are also a concern for ag lenders. Some farmers will need to do some serious evaluation before agreeing to pay higher land rental rates for 2020, which could lead to some large financial losses.
In many cases, landlords have lowered land rental rates in the past few years because of lower commodity prices and tighter cash flow margins. Now landlords are wondering if they need to make further adjustments. This can be a difficult decision, considering that real estate taxes on farm land are quite high in some areas. Demand for farm land remains very strong in some areas, but that demand has started to cool a bit because of those low prices. Serious and honest negotiation between farm operators and landlords will be required to arrive at equitable rental rates for 2020 and beyond.
An alternative for farm operators and landlords to consider for 2020 may be to enter into a “flexible cash rent agreement," hich sets a reasonable “base rental rate” that is based on average crop yields, typical production costs and projected 2020 prices. A flexible lease would have provisions to increase the final annual rental rate in the event of exceptional crop yields and/or higher than anticipated crop prices in 2020.
For more information about flexible lease agreements, email firstname.lastname@example.org
Iowa State University has good information available at its Ag Decision Maker web site, http://www.extension.iastate.edu/agdm/.