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Farmland Rent Considerations - Part 2: Tips for negotiations farmland rent

By Jonathan LaPorte, Bruce MacKellar
 
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, such as a mortgage 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, if market prices become volatile it can complicate 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:
  1. Nutrient content of soil – do you have a recent soil test?
  2. Crop productive index – from USDA NRCS soil survey tells how productive the soil is compared to other soil types
  3. 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?
  4. Crop production level (yields) – can you document what actual yields have been over the last 10 years?
  5. Herbicide application history – this can affect future crop rotation
  6. Drainage tile – in good working condition? What spacing? What type? When was it installed? Do you have a map of the lines and outlets?
  7. Surface drainage – do you have grass waterways where needed? Are they in good repair? Are there any washouts?
  8. Field size – How many tillable acres? Small fields (less than 40 acres) are generally discounted
  9. Access/obstructions – telephone poles, stone piles, narrow drive, buildings, near school, fences, on busy road or rural area?
  10. 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.
 
Another resource is the Michigan Farm Land Values and Rental Rates Survey.  This is an annual survey conducted by Michigan State University that asks producers to share the rent values being paid on their farm.  Based on the responses within a specific area, a “district average” for both land values and rents paid is collected.  The most recent survey report, as well as past surveys, can be found here: Michigan Farm Land Values and Rental Rates Survey.
 
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 December 2, 2019, the 20-year yield rate was 2.15 percent.
 

Land value ($/acre)

$3,000

$6,000

Rate of Return

3-4 percent

3-4 percent

Rental Rate ($/acre)

$90-120

$180-240

 
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.
 
The basic rule is that over time the cropping system that is put in place on a farm must generate the net revenue above cash costs to cover all land costs. Many farms are now looking at total land cost across all acres and using that calculation to determine the cash rents that can be paid and the land values that the farm can support if land is being purchased. The bottom line is as a farm income decreases, farmers will have to carefully evaluate their cost of production and may have to renegotiate land rents that are affordable to them.
 
If re-negotiation is needed on your farm, there are some options for different types of agreements that allow some flexibility in pricing land rent. It is expected that in the future the number of these types of agreements will increase. 
 
Source : msu.edu