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Land Lease Education Program
Ron HaugenNorth Dakota State University
Extension Service
2014 Women in Agriculture Educators National Conference Indianapolis, Indiana
April, 2014
2
Acknowledgments:
Dwight Aakre, North Dakota State University Extension Service, Farm Management Specialist
Willie Huot, Grand Forks County Extension Agent, North Dakota State University
North Dakota Crop Budget Regions
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NWNC
SW
NE
SC
EC
SE
NV
SV$71.00$117.00
$52.50$94.00
$39.50$66.80
$30.00$57.10$27.50
$37.70
$55.50$92.70
$38.00$55.50
$36.50$50.20
$28.00$36.80
North Dakota Land Rents by Region 2008 and 2013
Source: North Dakota Ag Statistics Office of USDA 4
• Agricultural land ownership has remained stable over the past five years. The 2007 Census of Agriculture shows that 62 percent of farmland in the U.S. is owned by the operator. Areas with more cropland, such as the Midwest, tend to have a greater percentage of rented land.
• In North Dakota approximately 66 percent of land is rented and 33 percent is owned by the operator
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Background: Land Ownership
6
• What is an equitable share agreement?
• Flexible cash rent agreements
• What can you afford to pay for cash rent?
• Landowner/tenant communications
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Core Topics
- Other current event topics were presented at sites including marketing and production information
Fixed and Flexible Cash Rental Arrangements
Fixed Cash Rent Methods
1. Cash rent market approach
2. Landowner’s cost or desired return
3. Landowner’s adjusted net-share rent
4. Operator’s net return to land
5. Percent of land value
6. Percent of gross revenue
7. Dollars per bushel of production
8. Fixed bushel rent
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Putting Flexibility in Cash Rent Agreements
• Crop-share leases were the original flexible rents
– The scale of today’s operations makes share rents somewhat impractical
• Cash rents may be adjusted by market prices, crop yields and production costs
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Advantages of Flexible Cash Rents
1. Landowner shares in additional income from:• Price increase• Yield increase
2. Reduced risk for operator when:• Prices drop• Yields are reduced
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Disadvantages of Flexible Cash Rents
1. Increased risk for landowner
2. Landowner may be concerned about accuracy of reported yields
3. Higher rent due to increased yields means the operator may be giving up some of the benefit from managerial input
4. Calculating the rent requires more management and communication
12
Methods of Flexing Cash Rent
Flexing for Crop Price Only• Increases risk substantially for operators
Example 1Base rent multiplied by ratio of current year’s price to base price
Base rent x (current year’s price ÷ base price) = current year’s rent $40 x ($7.50 ÷ $7.00) = $42.86
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Flexing for Crop Price Only
Example 2
Rent equal to the value of a fixed amount of commodity
“The amount of cash rent is equal to the value of 5 bushels of HRS wheat based on the average daily closing price for the month of September.”
5 bushels x $7.50 = $37.50
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Flexing for Crop Price Only
Example 3
Base rent with stated adjustments for prices outside a specified range
Owner and operator agree on a rent of $40 per acre if the current price of wheat is between $6.00 and $7.00 per bushel. For each $0.25 change in price above or below this range, the rent will increase or decrease by $1.50 per acre.
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Flexing for Crop Price Only
Example 4
Minimum base rent with upward adjustments.
Owner and operator agree to a base rent of $35.00 per acre if the wheat price is $6.50 per bushel or less. For each $0.25 per bushel increase, the rent will increase $1.50 per acre.
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Flexing for Yield Only
Example 1
Base rent is multiplied by a ratio of the current yield divided by a base yield to calculate current rent
$40 x (38 bu. ÷ 35 bu.) = $43.43
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Flexing for Yield Only
Example 2
Actual yield is multiplied by a fixed value per bushel decided in advance
Rent equals actual yield times $1.20 per bushel for wheat
38 bu. yield x $1.20 = $45.60 per acre
Flexing Rent for Price and Yield
Current Price Current YieldBase Rent x ----------------- x ----------------- = Rent Paid Base Price Base Yield
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Flexing for Price and Yield
Example 1Operator and landowner agree to a base cash rent tied to a base yield and a base price
Base rent x (current yield ÷ base yield) x (current price ÷ base price)$50 x (38 bu. ÷ 35 bu.) x ($9.00 ÷ $8.00) = $61.07
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Flexing for Price and Yield
Example 2Rent equals an agreed upon percentage of crop value
35 bu. x $8.00 x 20% = $56.00
• Total rent payment is flexible• Nearly identical to a crop-share lease• Appropriate percentage different for each crop• Percent share may change over time
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Flexing for Price and Yield
Example 3
Minimum base rent plus a bonus
Rent equals $40 plus 25% of total revenue per acre above $245.00 per acre
Actual revenue = 36 bu. x $8.00 = $288.00
Rent = $40 plus 25% x (288-245) = $50.75
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Base Rent Plus Bonus (Flex Rent)
Provides for a base rent plus a bonus if total revenue exceeds some level
ExampleBase Rent = 10% below average cash rent Revenue Threshold = farm’s average yield times
spring insurance priceLandowner Share Above Threshold = one third
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Flexing Rent on Price, Yield and Input Costs
• Price and yield are both important. However, it is the margin over direct costs that pays rent.
• Price volatility for input costs is increasing.
• Including the cost of seed, fertilizer, pesticides and diesel, and drying fuel will further protect the margin for the operator.
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Flexing Rent on Price, Yield and Input Costs
Example
Base rent is multiplied by a factor for price, yield and input costs
$50 x (current price ÷ base price) x (current yield ÷ base yield) x (base input costs ÷ current input costs) = current rent
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For Success or Flexible Rents
• Base rent, yields, prices, and input costs MUST be determined up front
• All details must be clearly stated in the contracts
• Yield, price, and input cost information needs to be identified for each crop grown
• Contracts should be reviewed annually
• Good relations between parties is a must!
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Affordable Cash Rent
Projected North Central Budgets, 2012Spring Wheat Corn Canola Soybeans
Per Acre Per Acre Per Acre Per AcreMarket Yield 37 90 1480 28Market Price 8.68 5.57 0.245 12.350Market Income $321.16 $501.30 $362.60 $345.80Direct Payment 9.00 9.00 9.00 9.00Total Income $330.16 $510.30 $371.60 $354.80
DIRECT COSTS Seed 19.80 66.74 47.00 64.75 Herbicides 24.50 17.50 19.00 17.50 Fungicides 5.50 0.00 0.00 0.00 Insecticides 0.00 0.00 0.00 0.00 Fertilizer 61.09 80.56 78.90 8.14 Crop Insurance 16.70 31.30 14.70 16.20 Fuel & Lubrication 17.68 25.82 18.13 14.61 Repairs 17.05 20.97 17.44 15.23 Drying 0.00 18.00 0.00 0.00 Miscellaneous 1.50 1.50 1.50 7.25 Operating Interest 3.76 6.04 4.52 3.30Sum of Listed Direct Costs $167.38 $268.43 $201.19 $146.98
INDIRECT COSTS Misc Overhead 6.86 8.91 6.91 6.36 Machinery Depreciation 19.84 30.29 20.64 18.44 Machinery Investment 11.68 16.99 12.16 10.29 Hired Labor 15.00 15.00 15.00 15.00Sum of Listed Indirect Costs $53.38 $71.19 $54.71 $50.09
Sum of all Listed Costs $220.76 $339.62 $255.90 $197.07
OPERATOR & LAND RETURN $109.40 $170.68 $115.70 $157.73
LISTED COSTS PER UNIT $5.97 $3.77 $0.17 $7.04
Percent of Rotation 40.00% 10.00% 30.00% 20.00%
WEIGHTED RETURN TO OPERATOR AND LAND $127.08 28
EXAMPLE
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Landlord/Tenant Communications
• Management objectives
• Experience and advanced training
• Education
• Occupation, family, organizations and community service
• Environmental statement
• Risk management strategies
• Communication
• Insurance coverage and primary financing
• References
• Newsletters
• E-mails
• Websites 30
Farm Resume
Program Administration
• Collaborated local county agents and sponsors – They helped with meeting locations and refreshments
• Used TurningPoint interactive ‘clickers’ to gather audience responses
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Number of Meetings and Attendees
• 33 workshops at 26 locations
• 1029 attendees
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North Dakota Land Lease Meetings 2012-2014
2012 Workshops 2013 Workshops 2014 Workshops
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Extension Agent Extension Email Extension Mail Extension Newsletter Newspaper Radio Relative/Friend0
20
40
60
80
100
120
Promotion
Make-up of Workshop Attendees
• Farm operators/Land owners (landlords)
– 45% farm operators
– 55% landlords
• Lenders
• Farm managers
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In five years land rents will be _______ compared to today?
0%
8%
19%
27%
46%1. Lower2. Same3. Up 10%4. Up 20%5. Up more than 20%
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Where will the costs of variable inputs be in 5 years?
0% 0%
33%
48%
19%
1. Lower2. Same3. Up 10%4. Up 20%5. Up more than 20%
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What is an equitable share rent for wheat with the landowner contributing only land?
5%
50%
9%5%
32%
landowner/operator1. 15/852. 20/803. 25/754. 30/705. 33/67
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Do you have any flexible rental contracts now?
96%
4%
1. Yes2. No
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If you have a flexible rental contract today, what factor(s) are used to adjust the rent paid?
0%
100%
0%0%
1. Price of crops produced2. Crop yields3. Price of inputs4. Gross revenue (yield x
price)
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0
50
100
150
200
250
300
350
As a Result of Participating in this Program
Yes No
Evaluation
0
0.5
1
1.5
2
2.5
3
3.5
4
Summary of Workshop Evaluation
Before After
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Take Away Points
• Need for further land lease education
– Tighter crop margins will make lease arrangements a more critical risk management decision.
• Landlord/Tenant relations
– An old and ongoing issue
– In most cases, more open and frequent communications creates a better working relationship between the parties
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Thank You!
Any Questions?
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Contact Information:
Ron Haugen [email protected]
Dwight Aakre [email protected]
Willie Huot [email protected]
