COLUMNISTS

Focus on Ag: Challenges in setting land rental rates for 2023

Kent Thiesse
Farm Management Analyst
Kent Thiesse

Arriving at equitable land rental rates is always an ongoing challenge for farm operators and landlords alike, which will likely be an even bigger challenge for the 2023 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 have gradually been increasing cash rental rates since 2019.

Approximately two-thirds of the farmland in the Upper Midwest is under some type of cash rental agreement. Based on farm business management land rental data compiled by the University of Minnesota, average rental rates from 2015 to 2019 in Minnesota declined by 10-20 percent, after showing an average increase of 40-50 percent from 2010 to 2014. Based on the U of M data, average land rental rates in the region for 2020 and 2021 increased by 5-10 percent. According to USDA Cash Rental Summary released in late August of 2022, average cash rental rates in most counties in 2022 increased by another 5-10 percent, as compared to average 2021 rental rates, and have increased by 15-20 percent since 2019. Farm management analysts expect 2023 cash rental rates to again show a significant increase in most areas, given the current strong corn and soybean prices.

The commodity prices for corn and soybeans in 2022 reached the highest levels since 2012-13, due to increased domestic usage and higher export levels of U.S. corn and soybeans and the associated decreases in the nation’s grain supplies. The final USDA national market year average (MYA) crop prices for the 2021-2022 marketing year were $6.00 per bushel for corn and $13.30 per bushel for soybeans. The MYA prices are the average farm-level prices, calculated from September 1 in the year of harvest, until August 31 of the following year. The MYA prices in other recent years for corn were $4.53 per bushel in 2020-21, $3.56/bu. in 2019-20, $3.61/bu. in 2018-19, and $3.36/bu. in 2017-18. Recent MYA soybean prices were $10.80 per bushel in 2020-21, $8.57/bu. in 2019-20, $8.48/bu. in 2018-19, and $9.33/bu. in 2017-18.

USDA is estimating the MYA average prices for the 2022-23 marketing year at $6.80/bu. for corn and $14.00/bu. for soybeans (as of 11-01-22). Current forward cash prices for Fall delivery in the 2023 crop year are near $5.50-$5.75 per bushel for corn and $13.00-$13.50 per bushel for soybeans at many locations in the Upper Midwest. The USDA Farm Service Agency (FSA) is using $5.40 per bushel for corn and $12.40 per bushel for soybeans as 2023 planning prices for FSA based annual farm loans in Southern Minnesota. However, FSA is using only $4.00 per bushel for corn and $10.00 per bushel for soybeans as planning prices on any FSA applications for loans that are amortized longer than one year.

Many farm operators will have significantly higher crop input costs in 2023, as compared to 2022 or 2021, which could result in some challenging breakeven price levels next year if 2023 land rental rates are set at quite high levels. Based on Southern Minnesota Farm Business Management (FBM) records, the average total direct cost in 2021 for seed, fertilizer, chemicals, fuel, etc. on cash rental acres, excluding land rents, was near $460 per acre for corn and near $245 per acre for soybeans. The average direct expenses for 2022 increased considerably for many farm operators, mainly due to higher fertilizer, chemical, fuel, labor and repair expenses. The 2021 FBM records showed an average of $106 per acre on cash rented corn acres and $68 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 for corn production to increase by 15-20 percent in 2023, with an increase of 10-15 percent for soybean production. Short-term interest rates on 2023 farm operating loans will be double the 2022 interest rates.

Typically, Southern and Western Minnesota farm operators use average yields between 175-200 bushels per acre for corn and 50-60 bushels per acre for soybeans for cash flow planning purposes. If the direct expenses for corn are $600 per acre, with overhead expenses of $120 per acre, and a land rental rate at $280 per acre, the total expenses, before any allocation for labor and management would be $1,000 per acre. With a corn yield of 175 bushels per acre, the breakeven price to cover the cost of production and land rent would be approximately $5.71 per bushel, which would drop to $5.00 per bushel with a corn yield of 200 bushels per acre. If a $60 per acre allocation for labor and management (family living expenses) is included, the corn price breakeven levels would rise to $6.05 per bushel with a 175 bushel per acre yield, and $5.30 per bushel with a 200 bushel per acre yield. If the cash rental rate or other expenses are $50 per acre higher than estimates, breakeven levels increase to $6.34 per bushel at 175 bushels per acre and to $5.55 per bushel at 200 bushels per acre.

Similarly, with soybeans, using direct expenses of $300 per acre, overhead expenses of $85 per acre, land rent of $280 per acre, and a management fee of $60 per acre, the total costs would be $725 per acre. The breakeven soybean price to cover the cost of production and land rent would be about $14.50 per bushel with a yield of 50 bushels per acre, which would decline to approximately $12.10 per bushel with a yield of 60 bushels per acre. There can be big differences in crop yields and expenses from farm-to-farm, which can cause breakeven prices to vary compared to the average. Based on 2021 FBM records for Southern Minnesota, the average breakeven prices on cash rented land to cover direct expenses and overhead costs, plus about a $50 per acre return to management was $4.09 per bushel for corn and $7.74 per bushel for soybeans. The 2021 FBM average yields in the same region were 203 bushels per acre for corn and 62 bushels per acre for soybeans.

Considerations for Flexible Cash Leases

An alternative to a flat cash rental rate that may be difficult to “cash flow” would be for a farm operator and landlord to consider using a “flexible cash lease” agreement that allows the final cash rental rate to vary as crop prices and/or yields vary or exceed 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 leases have been modified in recent years into a “bonus rent” agreement that uses a reasonable “base rental rate” that can “flex” upward with an added rental payment to the landlord, if the “base” crop yield and/or base crop prices (or the base crop revenue per acre) are exceeded; however, the final rental rate does not drop below the base rental rate. The big key, regardless of the flexible lease agreement, is that both the landlord and tenant fully understand the rental agreement, and the calculations that are used to determine the final rental rate.

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 in future years. It is extremely important that all aspects of a flexible land rental lease agreement be detailed in a signed written rental contract that includes the base rent, yield, and 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.

Resources for Land Rental Agreements and Flexible Leases

For additional information on flexible rental leases, land rental rates and 2023 crop budgets, as well as sample lease contracts, please forward an e-mail to: kent.thiesse@minnstarbank.com. Some other good resources on flexible cash leases, including sample cash rental contracts, are available on the Iowa State University “Ag Decision Maker” web site at: http://www.extension.iastate.edu/agdm/, as well as through University of Minnesota Extension at: https://extension.umn.edu/business/farmland-rent-and-economics.

For additional information contact Kent Thiesse, farm management analyst and senior vice president, MinnStar Bank, Lake Crystal, Minn., at 507-381-7960 orkent.thiesse@minnstarbank.com.