Farm Management Minute: Farmland leasing practices
The 2014 SDSU South Dakota Farm Real Estate Survey was released in May, 2014 and contains a wealth of information on land values and cash rents. Once again, ag land values increased from the previous year but at a much lower rate (6.1%) than the prior three-year period which saw annual increases ranging from 16.5% to 33.6%. Overall, agricultural land values in South Dakota have more than doubled since 2010 and have increased seven-fold since 2000.
This recent boom has created some healthy profits for the landowner as well as the operator who has benefited from several years of great returns on row crops, especially corn. I do see a few challenges on the horizon given the volatile nature of commodity prices and the threat of increasing interest rates. There are certainly several other factors that could impact land values but the two I mentioned may have a more immediate effect. From a producer’s point of view, there is the added risk of maintaining a good relationship with landlords in the current “boom” environment.
Along with the rising land values, cash rental rates have also experienced major increases with one region in southeast South Dakota reporting the highest average rent ever recorded during the past 24 years of the survey. According to the 2007 SD Census of Agriculture, approximately 40% of South Dakota ag land is covered by some type of lease arrangement. At one time, “hand-shake” agreements were the standard practice and I am not sure how many land rents are still based on oral leases. Keep in mind that oral leases only run from year-to-year and automatically renew unless either the landlord or renter gives notice on or before September 1st. This arrangement probably served both parties quite well in the past but I strongly encourage the use of written leases in order to clearly define the lease terms. According to South Dakota law, you need a written lease if you intend to rent farmland for more than one year at time.
In addition to having the lease terms in writing, it might be a good time to explore new leasing ideas given the explosive growth in both land values and cash rents. The flexible farm lease is a relatively new concept but seems to be a good solution for setting rental rates during periods of booming land prices and fluctuating commodity markets. The final rent is based on actual crop prices and/or production levels thereby allowing the risks and rewards to be more evenly shared between the landowner and operator. There are a variety of options to consider in structuring such an agreement and both parties must be willing to negotiate in good faith.
The 2014 Land Survey is available on-line at: http://bit.ly/1A7I8nZ. If you would like additional information on this topic, please contact Kathy Meland, S.D. Center Farm/Ranch Management. My work cell phone is 1-605-299-6760 or check out our website: www.sdcfrm.com.