NDSU economists say land rent should be a win for both parties
VALLEY CITY, N.D. -- Cash rent is likely to remain the dominant form of farm land rental arrangement in the region. But the number of "flexible cash" rental deals is increasing in a fast-moving market, experts say, and there always will be a smal...
VALLEY CITY, N.D. -- Cash rent is likely to remain the dominant form of farm land rental arrangement in the region. But the number of "flexible cash" rental deals is increasing in a fast-moving market, experts say, and there always will be a small percent of share-crop deals.
North Dakota State University agricultural economists talked about these choices in a farm land rental seminar March 7 at the North Dakota Winter Show in Valley City. It was the last of a series of 21 seminars given across the state in the past four months.
The NDSU Extension Service specialists say that for the past year or two, landowners have been in the driver's seat for land rental deals, but that could change.
Dwight Aakre, an NDSU farm management specialist, says volatility in farm commodity and land and rental values are leading to more flexible deals. Exact statistics aren't known, but he figures 80 to 85 percent of rental arrangements are cash rent deals -- increasingly, single-year arrangements. About 15 to 20 percent are flexible deals -- either the traditional crop share arrangements or newer flexible cash deals.
Aakre says the flexible cash arrangements are more sustainable if they can provide a win for both sides.
All flexible cash rent formulas start with a base cash price, and then include combinations of calculations to account for variability in commodity prices, yields and operating expenses. Farmers should be wary of using either crop price or crop yield alone as the only factor to calculate the flexibility. Both significantly increase the risk exposure for the farm operator.
Aakre notes that many farm landowners are becoming further removed from agriculture -- both emotionally and geographically. One alternative for landowners is to use the services of professional land managers.
The farm land management companies often take a 6 to 7 percent fee, but that may be worth it for the landowner. "We get a lot of calls from people who have no clue about what they really have," Aakre says. "They know they have land in Barnes County, but that's about all they know. They don't know what it's worth." In some cases, the landowners think what they have is more valuable than it is, and in other cases, renters are taking advantage.
What goes up . . .
Andy Swenson, another NDSU extension ag economist, says that while land values have increased dramatically, landlords must recognize the risk in them coming down. That would happen if loan interest rates go up or commodity prices go down.
The Federal Reserve System officials have indicated they'll keep interest rates at the current low through 2014, but recent statements have indicated they now are backing off of that projection, and tying interest rate changes to "triggers," including unemployment levels, Swenson says. Some influential economists have projected that if loan interest rates go up two percentage points, it would drop the value of land by 30 percent, he says.
Aakre says the biggest risk he sees is the potential drop in commodity prices. "I think that's going to happen sooner and it could be more drastic and it affects all land," he says.
Swenson says that what a potential land buyer is willing to pay for land will depend, in part, on whether they have to borrow money to buy it or whether they have cash. A typical bank loan involves a 35 percent down payment -- either in cash or in other mortgaged property -- and 65 percent borrowed. Debt must be serviced over a typical 20-year loan, and must be paid, after real estate taxes are paid, year after year.
"That's the nature of the beast," Swenson says. "These long-term capital asset investments, it's hard to project them ... I guess you just have to make your best guess. If you buy the land, you just have to hope that it works out. It's very hard to project what that income stream is actually going to be."
Make your guess
Swenson says one thing we know is that federal government direct payments are likely to disappear in 2014 in a new farm bill, which would cut $11 an acre across all crop acres in east-central North Dakota. That alone would theoretically knock $367 per acre off the value of an acre of land. The impact of that change would happen gradually.
A bigger negative would be if Congress whittles crop insurance subsidies. For farmers who pay $20 an acre for crop insurance premiums, the government pays $30 per acre. He says that isn't likely to happen, however, because of a strong, unified agricultural lobby to keep crop insurance strong.
Studies show that 98 percent of federal farm support subsidies get capitalized into the price of land, he says.
Willie Huot, an NDSU Extension Service agent in Grand Forks County, says negotiation over land rentals have become more difficult in the past five years. He says if people are used to discussing lease arrangements only once or twice a year, that's not enough for the flexible deals.
Copyright 2013, Agweek.