Deciding what is fair

Bau shares tips for navigating rental agreements

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PRESTON, Minn. — Determining a fair land rent price can be difficult. 

David Bau, who works with the University of Minnesota Extension in agriculture business management, tackled land rent at a seminar Oct. 31 in Preston. The seminar, “What is a Fair Rental Agreement for 2024?” is being conducted by Bau across the state.

Bau spoke on how to create estimated crop budgets based on data as well as how to calculate the price needed per bushel to pay for costs of the crop and family living expenses. He also touched on determining what amount landowners want per acre, types of leases and tips for rent negotiations.

When it comes to negotiations, Bau said to focus on each party’s interests, not on dollars per acre. 

“Don’t think in terms of $250 an acre, ... whatever you hear in the coffee shop,” Bau said. “It might be the right number, but it might not be.”

When negotiating, Bau said to create options that cause both parties to gain and create a win-win scenario. Some of the options Bau gave included adding clauses to agreements, considering utilizing flex rent agreements or using a margin model. He suggested using objective criteria when figuring prices.

Bau walked through how the lessee can determine their budget for the crops being put in the ground before they figure out a fair rent agreement. Bau specifically looked at corn and soybean budgets.

The first item to determine on a budget is the gross return per acre before expenses. Gross return is calculated by multiplying estimated bushels by estimated price and adding this total to any miscellaneous income. 

To help determine estimated yield, Bau looked at information on the highest average and lowest average crop yields each year in the past 10 years, the 10-year average of yields, the most recent yield results and the trends on yields for the crop. Information on yields across the state can be found at finbin.umn.edu. The next piece of information to consider, he said, is price per bushel estimates. This information is also found on FINBIN.

Once gross return is figured, it is time to consider expenses.

Bau said direct expenses include seed, fertilizer, chemicals, crop insurance, drying fuel, fuel and oil, repairs, any custom hiring costs, hired labor, machinery and building leases, utilities, marketing, operating interest, any other miscellaneous costs and land rent.

To estimate these costs, Bau considers the 10-year range of values on prices as well as the 10-year average, actual prices in 2022 and the trends for 2023 and 2024 in order to create a forecast.

The land rent in this estimate does not necessarily represent what the final rent determination will be but instead represents a number which considers historic land rent prices over the past 10 years and the price trends to help the farmer understand their full cost per acre.

For land rent estimates, Bau looked at data from both the U.S. Department of Agriculture, which indicated a 7% increase in land rent each year, and data from 1,200 farms’ records who participate in adult farm management in southern Minnesota, which indicated a 11.8% increase in land rent prices from 2021 to 2022 . Bau took an average of their respective average price increases to create a forecast rent for 2024. 

Land rent prices lag behind crop price by a few years, Bau said, meaning high land rent will linger past high dollars per bushel.

“They are slow to go up,” Bau said. “They didn’t catch up on the good times right away.” 

Bau said 30% of gross on corn and 40% of gross on soybeans is rent.

Overhead expenses, Bau said, include hired labor, machinery and building leases, farm insurance, utilities, dues and professional fees, interest, machinery and building depreciation and miscellaneous items.

Finally, a labor and management charge per acre should be added to expenses. 

Actual profit per acre is calculated by adding the direct expenses plus overhead expenses plus labor and management, subtracted from the gross return per acre plus government payments.

To determine a rental rate, take the projected income and subtract expenses to determine what is left for rent. 

Bau also showed how lessees can figure an acceptable price per bushel to break even by considering all costs figured in the crop budget plus the money needed for living expenses all divided by total bushels.

For landowners considering renting their land, they should consider the value of their farm. Average farmland sales statistics by county and township are available at landeconomics.umn.edu.

“Land prices are still retaining themselves,” Bau said. “They’re going up still even though prices are falling off.”

Once landlords know the value of their land, they can decide what their percentage desired return on investment is. For example, a $1,000,000 total value for a 150-acre farm multiplied by 1% return on investment equals $10,000. 

“When land prices go high, it’s hard for that to maintain that income,” Bau said. 

The return on investment plus real estate taxes, liability insurance and any other costs is the total return on investment. This total, divided by the number of acres, equals the desired land rent per acre for the landlord.

There are multiple types of leases for farmers to consider with landowners. First, there is a traditional lease, which specifies a predetermined amount per acre. However, there are also flexible leases.

Some flexible lease types include gross revenue-based leases that include a base payment and a final payment considering yield and price. There are also flexible leases with a base rent plus a bonus, flexible rent based on yield only or price only, or profit-sharing flexible rent agreements similar to crop share leases. 

“I try to encourage people to share the risk (and) rewards between farmers and landlords,” Bau said.

No matter what type of lease is determined, Bau said to make sure that contracts are not only verbal. Otherwise, it is impossible to officially determine what rent was agreed on. 

“Put something down in writing, period,” Bau said. 

When determining rent, Bau said, it is important to separate the people from the determination of what rent to charge.

“We’re not talking about their lifestyle,” Bau said. “We’re negotiating an asset and setting an agreement that works for both people.”

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