Tips For Negotiating Farmland Rent

By Dennis Pennington, Michigan State University Extension

Negotiating farmland rental rates can be challenging. Generally landowners and tenants want to be fair with each other and don’t want to be taken advantage of. Landowners need to cover the costs associated with owning land like land payment, insurance and taxes. Farmer-tenants need land in order to grow a crop and generate income. Most landowners and farmers alike want an easy way to determine fair rent prices. However, volatility in the market over the past few years complicates the situation. When prices and yields are good, farmers can afford to pay more for rent but, when commodity price recede, like they have recently, their ability to make higher rent commitments are eroded. Michigan State University Extension has some good resources, like the landlord checklist, for landowners and farmers in determining how to set rental rates.

What factors affect the value?

There are a number of factors that affect the value of land for rent and lease purposes including productive capacity of the field, accessibility and local farmer competition for land. Below is a list of ten items to consider when evaluating the amount that should or could be charged for cash rent:

• Nutrient content of soil – do you have a recent soil test?
• Crop productive index – from USDA NRCS soil survey tells how productive the soil is compared to other soil types
• Cropping history – what has been planted on the field during the last 10 years? What are the base acres and yields are as reported to the USDA Farm Service Agency?
• Crop production level (yields) – can you document what actual yields have been over the last 10 years?
• Herbicide application history – this can affect future crop rotation
• Drainage tile – in good working condition? What spacing? What type? When was it installed? Do you have a map of the lines and outlets?
• Surface drainage – do you have grass waterways where needed? Are they in good repair? Are there any washouts?
• Field size – How many tillable acres? Small fields (less than 40 acres) are generally discounted
• Access/obstructions – telephone poles, stone piles, narrow drive, buildings, near school, fences, on busy road or rural area?
• Proximity to wildlife cover – Do you have potential deer or other wildlife damage?

Not all of this information is easy to obtain but there are several resources are available to help you including Computing a Cropland Cash Rental Rate from Iowa State University. Communication between the landowner and farmer- tenant is key to a successful “win-win” agreement.

How to look up land rental rates for your county

The National Agriculture Statistics Service has county level data for cash rental values. This is a county average so this might not be a perfect fit for your farmland, but it can give you a good place to start. It can also be helpful to see what rental rates in neighboring counties are. The data can be accessed on the USDA website. The video below shows an example of how to use the site to access the data. Sometimes it can be tricky to find the data you want.

Return on Investment Method

Another method of determining rental rates uses return on investment. Anyone would expect to receive a return on their investment. Land is no different. It might be simpler for the landowner to use this method to get a ballpark price to use when negotiating with a tenant (farmer). This doesn’t take soil productivity and land improvements into account but it can be a place to start. To use this method, you simply determine an estimate of the desired return from the land; determine a fair annual return rate, then multiply. Some people use the 20 year U.S. Treasury Bond rate that can be accessed at the U.S. Treasury Department Resource Center. On April 1, 2015, the 20 year yield rate was 2.23 percent.

Impressions vs. reality

Land rent should be based on real numbers, not coffee shop talk. The fact is that land rent prices are highly variable and depend on many factors. Just because a neighbor has one field renting at a high price doesn’t mean that all of his or your land is worth the same value. Make sure you do your homework.

This series of four articles was written to help landowners and farmers explore options for land rent. Over the past five years, crop prices have reach all time record highs. During that time farmers were competing with each other for land to farm which drove up rental prices significantly. The crop market has recently adjusted and the record high crop prices are not even on the radar screen. This can put stress on farmers and landowners alike when negotiating terms. No one likes to get a cut in pay, but that may have to be reality over the next 2-3 years. Keeping good communication and being honest with each other will go a long ways in maintaining strong relationships.

Summary

Quality land with good fertility, well-spaced tile, a good Farm Service Agency base are all plus factors toward stronger rental rates. Landowners that have not made efforts to maintain their farm land or invested in improvements like drainage tile general receive farm land rental rates that are 25 to 30 percent lower than other properties in the same area. Having good communication between the land owner and the farmer-tenant is one of the most important first steps in establishment of a win-win farm land rental agreement.

Other articles in this series:

• Farmland rent-past, present and future
• Projected commodity prices impact farms margins and rent
• Farm land rental agreements and arrangements

Source:msu.edu