Farm Management Minute: Farmland leasing practices
The 2016 SDSU Farm Real Estate Survey was recently released and contains a wealth of information on land values and cash rents. For the first time in many years, overall ag land values decreased 2.4 percent from the previous year with cropland values down 4 percent and rangeland up 2.9 percent. This downturn marks a substantial change from the three-year period of 2010 to 2013 which saw annual increases ranging from 16.5 to 33.6 percent. In the prior two years of 2014 and 2015, growth rates had slowed to 6.1 percent and 1.4 percent, respectively.
Although the large boost in land values created some healthy returns for the landowner due to very profitable farm profits during the boom years of 2010 to 2013; since then, a pause is underway due to a downturn in the ag economy. It will be interesting to see if a larger correction in land prices will occur as there are so many factors which influence market conditions. According to our most recent South Dakota Farm/Ranch Management Annual Report, the overall financial health of farm operations remains relatively strong despite tight profit margins during the last couple of years. In addition, mortgage interest rates remain historically low, and that factor alone seems to offer a great deal of support for high-quality farmland. From a producer’s point of view, there are numerous challenges in acquiring more ground in a competitive land market.
Along with slightly lower land values, cash rental rates also experienced minor decreases in 2016 but there is a wide range of values depending on the productivity of land. With cash grain prices down drastically from their peak values in 2012 along with a sharply lower cattle market, farm profitability has greatly eroded which is generating quite a discussion on cash rental rates. As noted in the SDSU publication, land rental rates remain very competitive and have not seen a major downward correction. 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 1. 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 such as flexible farm leases. This is a relatively new concept but seems to be a good solution for setting rental rates during periods of strong land prices and volatile changes in 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. I would encourage both the landowner and producer to review the 2016 Land Survey as it provides an excellent source of data in your local area. The publication is available on-line at the SDSU web-site: http://igrow.org/agronomy/ under the resources tab, publications.
If you would like additional information on this topic, please contact Kathy Meland, South Dakota Center for Farm/Ranch Management. My work cell phone is 605-299-6760 or check out our website: www.sdcfrm.com.