DENVER – While the percentage of leased farmland in the United States has remained relatively constant over the past 10 years, the terms that have ruled profit distribution and operational management on millions of these acres are changing.
“New provisions in the Farm Security and Rural Investment Act of 2002 are driving a wave of change in farmland rental agreements,” said Dennis D. Hoyt, accredited farm manager with The American Society of Farm Managers and Rural Appraisers.
“A more positive stream of benefits under the new farm bill and a means testing provision are both influencing lease arrangements and rental fees. These factors are increasing the number of cash rent leases and the amount of cash rent received by landowners.”
Increases. According to Hoyt, new crop bases and yield information, which reflect actual production history combined with the favorable fixed payments and counter-cyclical payments, will increase most farming operations’ annual net income through 2006.
“With increased revenue potential for the farm, it’s anticipated that upward price adjustments in rental fees will be the end result on millions of rented crop acres,” he said.
Making the case. As with past farm bills, commodity payments are traditionally paid to the person or persons at risk.
“Over time, increases or decrease in expected revenue get factored into rent figures,” Hoyt said.
Under the new bill, the various payments may include an annual direct payment, loan deficiency payment and counter-cyclical payments.
Direct payments. Direct payments apply to all program crops and are determined by the acres in each crop base and the program yield for that crop.
Direct payments are made from your established yields and calculated on 85 percent of the crop base acres.
According to Hoyt, an important feature of the newly established direct payment provision is that it remains fixed for six years once crop bases and program yields are determined.
“What happens to planted acres, actual yields and prices after that will not change the value of the payments,” he said.
“So, direct payments have essentially no effect on price risk except that they provide extra cash in addition to the revenues received from the market.”
Counter cyclical. Also worth mentioning is the counter-cyclical payment process.
Under the new farm program counter-cyclical payments are paid when the average national market year price in below $2.32 for corn and below $5.36 for soybeans.
The yearly average price is an average of cash prices paid during September to August following harvest.
It is weighed by the quantity of grain sold in each month and in each state.
Significant increase. According to Hoyt, with the increased loan rate for corn and wheat, and the newly added direct payment for soybeans, the potential counter-cyclical payments and opportunity to adjust bases and yield, total payments per farm in the Midwest alone looks to increase 15 percent or more above the past program payments.
“This is fairly significant in terms of improved gross revenue for the grower. And as we enter our second year of implementation, both landowner and operator should now be fairly clear on what the payments will be for each farm,” he said.
“With that understanding, landowners and growers will be looking at how these payments should be shared. Another key factor is the continued aggressive demand for rental acreage by the grower. Therefore, lease modifications are to be expected especially for row crop acres concentrating on corn and soybeans.”
Lease rate. Hoyt believes that in high-yielding regions where cash rents dominate local agricultural markets, lease rates have ventured as high as 8 percent to 10 percent over the past 2 years.
“It really comes down to what the final payment numbers are for each individual farm,” he said. “Not every situation allows for these kinds of major gains. But throughout much of the Midwest and Eastern row crop areas there will be adjustments sooner or later.”
Against change. While the farm bill adds stability to almost all cropping segments, it is not to be assumed that rental rate increases will be a nationwide mainstay.
In southern regions, especially where farmers plan to rotate from soybeans back to cotton, rice or other specialty crops, industry professionals like W. Stacey Gillison, accredited farm manager, do not anticipate an upward shift in rental fees in the immediate.
“Southern growers are finally receiving the kind of government assistance needed to maintain production of such labor intensive crops like cotton and rice,” he said.
‘”These producers need a couple of good production years under their belt in order to fully realize government program benefits for their operations.”
Demand drives price. Without question, the new farm bill is a driving force behind current rental values in many regional markets.
Competition however is another factor influencing rental hikes.
“Competition among operators for farmland remains strong and will probably remain this way for years to come,” said accredited farm manager John Meek
“For much of the West and Pacific Northwest where acres are committed to specialty and non-program crops, the farm bill has had minimal impact on operator’s and landowners’ bottom line profit shares.”
Bigger. Better? Farming trends everywhere show that larger, more aggressive operators can take on higher rents since they have the resources and capital readily available for immediate expansion.
Plus they have production efficiencies and borrowing power to aid in their success even when commodity prices are depressed.
However, Meek points out that “bigger is not always better” when landowners are looking for a change in operational management of their land investments.
“The prospective tenant who is willing to pay the highest price for renting your ground is not always the best candidate,” he said.
“When making a change in tenancy, make sure that final price per acre is not your only consideration.”
Criteria. Meek expands on this by outlining criteria used when seeking out new tenants for his absentee landowner clients: ask questions; be clear on objectives; demand a written lease; stay current on industry issues; request yearly meetings; reserve judgment; allow for change; and investigate relationship/business restraints.
Meek believes that in order for lessee-lessor success to be realized, proper utilization and enforcement of the lease agreement is critical.
He also thinks it to be critical that landlord and tenant have a relationship focused on trust and solid communication.
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Farm lease options
* Cash rent – A set amount per acres is paid by the operator to the landowner. The landowner had no role in crop production. Tenant assumes the risk of price and yield.
Half of the rent is paid in the spring with the balance paid immediately following harvest. It is also more popular to require all cash rent in the spring.
* Crop share – Crop income is divided between the landowner and operator in the same percentage as the cash crop expenses are divided.
Both parties share equally in yield, government program benefits and price risks.
* Modified crop share – The landowner is responsible for providing seed and crop protection inputs. Operator is responsible for labor, equipment and fuel.
Each party is responsible for drying and storing his or her respective portion of the crop.
The landowner typically claims a greater portion of the crop depending on the quality and production history of land.
* Custom arrangement – The landowner pays a local operator a predetermined cash amount to complete necessary fieldwork (field tillage/planting/harvest).
Landowner assumes all risks, pays all expenses, but receives 100 percent of profits and government payments.
* Percentage lease – Similar to cash rents whereby landowner receives a predetermined percentage (30 percent to 40 percent) of the crop and also a percentage of the government payment.
Operator is responsible for all expenses.
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