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Flexible rental agreements asset for land operators

By Janet Kubat Willette

Date Modified: 01/14/2014 1:09 PM

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ROCHESTER, Minn. — Bleak.

That's how University of Minnesota Extension educator David Bau described the financial outlook for corn and soybean growers in 2014.

Bau, an Extension educator who specializes in agricultural business management, brought his "What Is a Fair and Profitable Rental Agreement?" presentation to Rochester. Bau gave 25 presentations across the state this fall and winter.

About 30 attended his morning presentation in Rochester; an afternoon session followed.

The two-hour presentation is an intense immersion in numbers. Bau reviews corn and soybean budgets, cropland and pasture rental rates, farmland prices and presents cash rent worksheets. He also offers information on flexible land rental agreements.

No incentive exists for landowners to enter into a flexible land rental agreement, Bau said, but the agreements do allow both the landowner and the land operator to share in the risk and reward of farming.

Bau gave five examples of flexible rental arrangements:

• Flexible rents based on gross revenue.

• Base rents plus a bonus.

• Flexible rent based on yield only.

• Flexible rent based on price only.

• Profit sharing flexible rent agreement.

But there are many other types of flexible rental agreements, he said. Bau estimates that 80 percent of Minnesota's rents are cash, with 10 percent a crop share agreement and the remaining 10 percent a flexible lease arrangement. There is no way to track this data, it's based on what he hears from people.

Retired farmers are the most likely to enter flexible land agreements, Bau said. Those who inherit land are most likely to want cash. They tend to view the land as another of their assets.

Next year is setting up to be a reversal of recent trends. The cash price for corn has dropped more than $3 — almost in half — in one year.

Rental rates, which averaged two-thirds of net farm income for the past 15 years, have fallen to 49 percent in the past five years.

If corn prices stay at $4, Bau's figures showed 70 percent of farmers could lose money next year, but rental rates aren't expected to decline. Rather, it could take a couple years for both land rental rates and land values to decline if corn prices hover around $4 or below. Bau said downward pressure exists on corn prices, and he doesn't yet see a floor in the market.

Soybean prices, on the other hand, seem to be showing strength or at least going sideways. Soybeans could be more profitable than corn in 2014.

Bau said soybeans have been $12 per bushel or higher 50 percent of the time in the last five years. During the last 10 years, that percentage drops to 30 percent of the time.

For corn, prices have been $5 or higher 58 percent of the time during the past five years. During the last 10 years, that percentage drops to 34 percent of the time.

What can crop farmers do to prepare for lower prices in 2014?

Bau suggests they look for opportunities to get $5 or $6 per bushel for corn and take them. Also, work with landlords to convince them of the benefits of a flexible least agreement.