Leasing Issues & Cropland Rental Rates

Leasing Issues & Cropland Rental Rates

Where are cropland rental rates headed for 2012? Landlords and tenants need to consider several key factors as they negotiate leases for the coming year.

What is a fair rent for cropland? Fair to both landlord and tenant? With whip-saw grain markets in 2011 and rising costs of crop production, there are a number of things to consider when you look ahead to 2012 regarding land rent--how much to charge if you are a landlord or how much to pay if you are a farm operator.

Kelvin Leibold, an Iowa State University Extension farm management specialist at Iowa Falls in north-central Iowa, provides the following guidelines to help you figure out a farm lease agreement that best fits your situation. He explains a number of helpful resources available on the ISU Ag Decision Maker website you can use.

His advice is to start by reviewing ISU's survey of 2011 rental rates in Iowa. The results of that survey are explained in a May 2011 ISU Ag Decision Maker newsletter article which you can find on the Ag Decision Maker website. The article is titled Farmland rental rates increase sharply for 2011.

The article provides highlights from Information File C2-10, 2011 Iowa Cash Rental Rate Survey, (www.extension.iastate.edu/agdm/wholefarm/html/c2-10.html) which is available on the Ag Decision Maker website or at county Extension offices.

Where are Iowa cropland rental rates headed for 2012?

When landlords and tenants establish rental rates they often look at: what others are paying, average crop yields, Corn Suitability Rating Index, share of the gross crop value, the return on investment, percentage of the crop and the tenant's residual.

In recent years the tenant's residual has received a lot of scrutiny. For more information on the methods listed, read Information File C2-20, "Computing a Cropland Cash Rental Rate" on calculating rental rates. A decision tool for analyzing the different methods is also available.

Using the tenant's residual method for figuring cash rent

When people use the tenant's residual method they need to look at the potential range of outcomes. The volatility in yields has increased as weather patterns have become more variable. The volatility in prices has increased with exports, new uses for commodities such as ethanol, increased production in other countries and more world trade.

Government programs, including crop insurance, have helped to stabilize some of this volatility but not to the extent that we saw in previous farm bills. Revenues can change by hundreds of dollars per acre in a matter of a few days.

What's happening with crop prices and production cost?

Two producers with similar costs of production can have significantly different gross revenues due to their final yields, marketing, crop insurance and cost of production. For recent trends in grain prices you can refer to Information File A2-11, "Cash Corn and Soybean Prices" which gives monthly prices for Iowa.

The Season Average Price Calculator is another resource. The associated decision tool allows you to estimate future corn prices for the current crop year; just click on the calculator in the upper right corner of the screen to download the interactive spreadsheet. When adjusted for basis the CME Commodity Prices (www.cmegroup.com/trading/agricultural/) will give you an idea of what the market thinks future prices will be. At the ISU CARD website are Daily Corn and Soybean Basis Maps for Iowa and the Midwest, so you can look at the current basis or go back to previous dates to see how it changes over time.

Use budgets to figure your cost of crop production

Information File A1-20, "Estimated Costs of Crop Production" takes you to the various crop production budgets. These are the 2011 budgets but will be updated to estimate what the 2012 budgets will be in coming months. If you want to enter your own data and look at the combined economics of crop rotations go to decision tool, Crop Rotation Summary.

The costs to watch for the coming season include seed, fertilizer and machinery costs. Higher grain prices will allow the seed industry to increase seed costs and technology fees.

The fertilizer industry is seeing increased worldwide demand with some governments subsidizing the cost to their domestic farmers. Some Iowa farmers have been "booking" fall fertilizer already and paying 20% or more down to lock in a price and a guaranteed supply.

Several of the major machinery manufacturers are running at full capacity and they have faced increased costs for steel and tires along with new environmental regulations for engine emissions. This, along with higher fuel prices, is driving up machinery costs.

With the weather variability we will see significant differences between counties and even within counties when it comes to yields. Soil types, drainage and weather all impact yields.

Outlook for 2012 crop prices and government programs

When you look at the CME Group grain prices for 2012 new crop corn and soybean prices you see a high of $6.45 per bushel for corn and $13.65 per bushel for soybeans, respectively. However, December 2012 corn has traded in a range of more than $1.30 per bushel just since March. We can easily see a $1 swing in the price of corn for 2012 (higher or lower) which may change the gross revenue by as much as $200 per acre.

November 2012 soybeans show a similar pattern with a range in prices of more than $2 per bushel in the past 5 months. Expect 2012 harvest basis for corn to average about 50 cents under the December futures contract for harvest delivery statewide. Harvest basis for soybeans should be about 70 cents per bushel under the November futures contract.

At this point it looks like the 2012 costs of production may increase around $75 per acre. The Farm Bill safety net, Average Crop Revenue Election (ACRE), will provide a higher level of revenue coverage than in the past, but will still be below levels producers will find acceptable. This program currently has less than 15% of the producers in Iowa participating.

With the current high grain prices there is very little safety net in the traditional programs such as Loan Deficiency Payments and Counter Cyclical Payments. Corn prices, for example, would have to drop by half before any of these payments would kick in.

The new farm bill will probably reduce or eliminate direct payments after 2012 as well. The only real safety net at this time is crop revenue insurance at high levels. If the grain prices in February of 2012 are lower, then the safety net will also be much lower. 

Legal issues to consider when terminating a lease

One common topic that comes up frequently deals with the issue of terminating leases. The ISU Center for Agricultural Law and Taxation's (CALT) leasing publication, Iowa Farm Leases - Legal, Economic, and Tax Considerations, goes into detail on page 6 discussing the ways to terminate a lease. The article also addresses the issues of material participation, USDA payments, landlord liens and many other topics. AgDM File C2-19 shows an example form for terminating a lease.

The CALT website also provides a list of New Iowa Legislation Impacting Rural Landowners and Agricultural Businesses (Effective July 1, 2010). There are a couple of new legal issues that may be of interest. They deal with work on drainage districts and who owns the aboveground stover and residue.

Iowa Legislation, House File 2458 addresses the issue of mowing road ditches. The mowing of ditches is banned during the songbird nesting season with several exceptions. If your lease requires the ditches to be mowed, you might want to make sure you are in compliance with the new law.

Time well-spent: Attend a farm leasing meeting near you

The resources listed above and more are available on the Iowa State University Extension "Ag Decision Maker 2011 Leasing page." Also included on that page is information on the 2011 ISU Extension farm leasing meetings being held in July and August. There are 50 meetings being held at various locations around the state.

For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.

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