Farm Horizons, December 2012
Fair agricultural land rental rates share the risk and reward
By Jennifer Kotila
The number one question received in the Minnesota Extension Office in Buffalo is how much should be charged for land rent, said Brenda Postels, agricultural educator for Wright County. She also noted her surprise that so few farmers and landowners have contracts for their rental agreements.
David Bau, an educator for agricultural business management from the Minnesota Extension Office in Worthington, has been traveling throughout Minnesota teaching farmers and landowners how to calculate a fair deal for renting agricultural land.
Land rental prices vary greatly, even within the same county, Bau noted. Last year, some counties had $500 per acre differences in rent, but most land rents per acre were around $200.
For instance, when looking at the data collected from the 2,000 farms that are part of the Adult Farm Management FINBIN database in Minnesota, rental rates for agricultural farmland in McLeod County was an average of $155 per acre in 2010, ranging from $110 in the bottom 10th percentile to $259 per acre in the top 90th percentile.
In Meeker County, rental rates were an average of $128 per acre in 2010, ranging from $44 to $206 per acre; the average in Carver County was $161 per acre, ranging from $100 to $213; and there were not enough farmers in the Wright County participating in the Adult Farm Management program to generate numbers for FINBIN in 2010.
Data provided by the Minnesota Agricultural Statistic Service show the average rent paid for cropland in Carver County in 2012 was $197; in McLeod County, $213; in Meeker County, $169; and in Wright County, $135.
For the last 10 years, average rental rates in Meeker County ranged from as low as $79 per acre in 2002 and 2003, to a high of $170 per acre in 2012, according to information from the FINBIN database. In McLeod County the range was $93 per acre in 2002, to $170 in 2012. In Wright County, the average low was $69 in 2002 to an average high of $155 in 2012. There were not numbers for Carver County.
So, how are landowners supposed to know what to charge for rent, and how are farmers supposed to know what is a fair rental price?
Generally, one-third of the net profit from an acre of land should go to the farmer/renter, and two-thirds should go to the landowner/rentee, which has been the trend for the last 10 years, Bau said. However, if taking the average for the last five years, the landowner/rentee has received 49 percent of the profits, and the farmer/renter has kept the remaining 51 percent.
Historically, records show landowners/rentees receiving 74 percent of the profit from the land, and the farmer/renter keeping the remaining 26 percent, Bau said.
“What is a fair rental price? I would argue all would be if they share the risk and reward between the landowner and the farmer,” said Bau, who recommends farmers and landowners enter into flexible agreements for land rental.
There are a number of different resources for landowners and farmers to use to figure out fair rental agreements that take into account all the data for a particular plot of land. Farmers and landowners should use the tools available to them to determine a fair deal.
For a landowner to figure out the return wanted for renting land, a landowner’s worksheet is useful. The worksheet should take into account the farm size, value, desired return on investment, Real Estate taxes, and other expenses to determine the desired rent.
Another helpful worksheet for farmers is the acceptable price worksheet, which helps determine the break-even price needed for a crop.
Farmers should use an operators cash rent worksheet to figure what can be afforded for rent. This worksheet is much more detailed, taking into account everything a farmer needs to know to determine if a profit will be made.
Some farmers and landowners choose to have a lease agreement with a flat-cash rent rate. Others choose a flexible lease, which can be based on various criteria, and shares the risk and reward.
Flexible agreements can be based on the gross revenue from the land, a base rate plus an established bonus for the landowner if the farmer does well, an agreement based on yield only, an agreement based on price only, or profit-sharing agreement.
More data, information, sample lease agreements, and worksheets can be found at various places on the Internet, or by visiting the local extension office. Helpful data and statistics can be found at www.nass.usda.gov; www.finbin.umn.edu; www.ccffm.umn.edu; and www.extension.umn.edu.
An acceptable price worksheet and operator’s cash rent worksheet can be found at www.swroc.cfans.umn.edu/SWFM/farm_management.html.
For more information, contact Bau at (507) 372-3900 ext. 3906, or firstname.lastname@example.org. Bau also has the 2012 Farm Resource Guide available at a cost of $25, plus postage and handling.