Focus on ag: Challenges in setting land rental rates for 2022
Arriving at equitable land rental rates is always an ongoing challenge for farm operators and landlords alike and will likely be an even bigger challenge for the 2022 growing season.
Many times, land rental rates for a coming crop year are based on the profitability in crop production in the previous year or two before. In some cases, this can present profitability challenges for farm operators, if grain prices drop or there are yield challenges. On the other hand, there can be extra profit for farm operators in years with above average yields and higher levels of crop prices. Many landlords reduced land rental rates from 2015-2018 and would like to return to higher rates.
Based on farm business management land rental data compiled by the University of Minnesota, average rental rates from 2015 to 2019 declined by 10% to 20%, after showing an average increase of 40% to 50% from 2010 to 2014. Based on the U of M data, 2020 average land rental rates in the region were steady to slightly higher. According to U.S. Department of Agriculture Cash Rental Summary released in late August 2021, average cash rental rates in most counties increased by 5 to 10% in 2021, as compared to average 2020 rental rates. Farm management analysts expect 2022 cash rental rates to show another fairly significant increase in most areas, compared to 2021 rental rates, given the current strong corn and soybean prices.
USDA is estimating the 2021-22 MYA average prices at $5.45 a bushel for corn and $12.35 a bushel. for soybeans (as of Oct. 1). Current cash corn prices for fall delivery for the 2022 crop year are near $4.75 or $5 per bushel at many locations in the Upper Midwest, while 2022 cash soybean prices are near $11.50 to $12 per bushel. This is lower than the current USDA projections for the 2021-22 marketing year (listed earlier). Most farm operators do not begin forward pricing their corn and soybean crop until the year production, so there has been very little forward pricing of the 2022 crop at this point. Many farm operators will have significantly higher crop input costs in 2022, as compared to 2021, and could face some challenging breakeven price levels next year if 2022 land rental rates are set at quite high levels.
Based on Southern Minnesota Farm Business Management records, the average total direct cost in 2020 for seed, fertilizer, chemicals, fuel, etc., excluding land rents, on cash rental corn acres was very near $425 per acre, and was near $225 per acre on cash rented soybean acres. The average direct expenses for 2021, excluding land rent, increased slightly for most farm operators, mainly due to slightly higher fertilizer, fuel and repair expenses. The 2020 Farm Business Management records showed an average of nearly $100 per acre on cash rented corn acres and $65 per acre on soybean acres for overhead expenses, which includes machinery costs, hired labor, insurance, and other ongoing expenses, but does not include any net return to the farm operator. Most farm management analysts expect total direct and overhead expenses, including land rent, to increase by 10-20 percent for corn production in 2022, with an expected increase of 10-15 percent for soybean production.
Typically, many Upper Midwest farm operators use average yields between 180 and 200 bushels per acre for corn and 50 to 60 bushels per acre for soybeans for cash flow planning purposes. If the direct expenses for corn are $500 per acre, with overhead expenses of $115 per acre, and a land rental rate at $250 per acre, the total expenses, before any allocation for labor and management would be $865 per acre. With a corn yield of 180 bushels per acre, the breakeven market price to cover the cost of production and land rent would be approximately $4.81 per bushel, which would drop to $4.33 per bushel with a corn yield of 200 bushels per acre. If a $50 per acre allocation for labor and management (family living expenses) is included, the corn price breakeven levels would rise to $5.08 per bushel with a 180 bushel per acre yield, and $4.58 per bushel with a 200 bushel per acre yield. If the cash rental rate is increased to $300 per acre, the breakeven levels increase to $5.36 per bushel with a 180 bushel per acre yield and to $4.83 per bushel with a 200 bushel per acre yield.
Similarly, with soybeans, using direct expenses of $250 per acre, overhead expenses of $85 per acre, land rent of $250 per acre, and an allocation of $50 per acre for labor and management, the total costs would be $635 per acre. The breakeven soybean price to cover the cost of production and land rent would be about $12.70 per bushel with a yield of 50 bushels per acre, which would decline to $10.58 per bushel with a yield of 60 bushels per acre. If the land rental rate is increased to $300 per acre, the soybean breakeven price increases to $13.70 per bushel at a 50 bushel per acre yield, and $11.42 per bushel at a 60 bushel per acre yield.
There can be a big difference in crop yields and expenses from farm-to-farm, which can cause breakeven prices to either increase or decrease, compared to the average. Based on 2020 Farm Business Management records for southern Minnesota, the average breakeven price for corn on cash rented land, in order to cover direct expenses and overhead costs, was $3.58 per bushel, with a range of $3.08 per bushel. to $4.16 to bushel. The 2020 Farm Business Management average breakeven price for soybeans was $8.32 per bushel, with a range of $7.23/bu. to $10.03/bu. The 2020 FBM average yields were over 205 bushels per acre for corn, and nearly 60 bushels per acre for soybeans, which were above average.
Considerations for flexible cash leases
An alternative to a flat cash rental rate that may be difficult to “cash flow” would be for producers and landlords to consider using a “flexible cash lease” rental agreement, which allows the final cash rental rate to vary as crop prices and/or yields vary, or as gross revenue per acre exceeds established targets. The use of a flexible cash rental lease is potentially fairer to both the landlord and the farm operator, depending on the situation, and how the flexible lease is set up. Most flexible cash leases are actually set up as a “bonus rent’ agreement, which allows for the landlord to receive additional land rental payments above a “base” land rental rate, if the actual crop yields and/or market prices, or the gross revenue per acre, exceed established “base” figures. The bonus rental agreements typically do not allow for any downward movement of final rental rates below the base rental rate.
Flexible leases can work well for newer or younger farm operators that may not be able to afford the higher cash rental rates for farmland. A flexible lease makes it easier for producers to utilize risk management tools such as crop revenue insurance policies and forward pricing of grain. A flexible lease, with a fair base rental rate, allows landlords the security of a solid base rental rate, while having the opportunity to share in added profits when crop prices and/or yields exceed expectations, such as occurred in many areas in 2021. Flexible leases are a nice alternative for landlords that want to continue to work with long-standing farm operators on multi-year rental contracts, without setting cash rental rates too high to keep the current tenants.
Utilizing “flexible cash lease agreements” between farm operators and landlords can be a good management strategy as an alternative to extremely high straight cash rental rates; however, these agreements need to be fair and equitable to all parties. Landlords also need to be willing to adjust the “base” cash rental rates lower as necessary if crop margins become quite tight, as occurred from 2015 through 2019. It is extremely important that all aspects of a flexible land rental lease agreement be detailed in a written rental contract that is signed by all parties. The agreement should include the base rent and yield, price determination, as well as other provisions of a flex lease. Successful “flexible cash lease agreements”, just as any other long-term cash rental agreement, have always involved cooperation, trust, and good communication between the farm operator and the landlord.
For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 or email@example.com.