University of Minnesota Extension
www.extension.umn.edu
612-624-1222
Menu Menu

Extension > Agricultural Business Management News

Monday, April 20, 2015

Flexible Farmland Rental Agreements Shares Risk between Landlord and Farmer

by David Bau, Extension Educator

The vast majority of farmland rental agreements are cash rental agreements where landlord receives a cash amount in spring or half payment in spring and fall or payment in fall.  With cash rental agreements, the landlord knows how much income they will receive and the farmer has the risk to grow a crop sufficient to generate enough income to cover input costs, the rental payment and hopefully have some left for profit. Current 2015 forward contract prices available are $3.50 for corn and $9.00 for soybeans, and that poses a problem for farmers with breakeven prices about $4.50 per bushel for corn and $9.00 for soybeans to cover the cost of production.  With a cash rental agreement, the farmer bears all the risk of prices not reaching the breakeven prices during the year, this is when a flexible rental agreement would work better.

With a flexible agreement landlords can still have a minimum rental payment in spring and then have an additional payment in the fall if criteria of the lease agreement are met.  I completed over 46 talks this fall and winter on rents and outlook for 2015 and used $3.50 corn price and $10.00 soybean price and average input costs to determine farmer profits and farmland rental rates.  I used yields of 180 bushels per acre and 50 bushels for soybeans. I used a cash rental rate of $250 per acre and the farmer would receive $60 per acre for their labor. Using these prices, farmers would lose $304 per acre for corn and $101 per acre on soybeans before government payments.  There will probably be some farm payments on the 2015 crops, using 460 per acre on corn and $30 per acre for soybeans the loss would still be $244 for corn and $71 per acre for soybeans. These numbers would suggest the base rent should be less than $250 based on current 2015 commodity prices.

Most Flexible Rental Agreements have a base rent component that assures the landlord this income and will allow the tenants to cover expenses even after a bad year with good crop insurance coverage.  Base rents vary by area but for Southern Minnesota the range for base rents could be from $100 to $200.  Then a flexible component is added, either based on price, yields, gross revenue or some combination of these components.  There are many ways to set up a flexible land rental agreement.  The farmer and landlord should determine what both are looking for.  The higher the base rent the more risk the farmer has, the lower the base rent the landlord is increasing their share of the risk with no crop insurance to protect their revenue.

Here are some short definitions of different types of flexible rental agreements:

  • Flexible Rents based on gross revenue: Rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.   Prices can be set once a year, twice, three, four or more times and then averaged.
  • Base rents plus a bonus: A base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal.  Then these additional bushels would be shared between landlord and tenant.  The bonus can also be determined by yield and price together or price alone.
  • Flexible rent based on yield only: The landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment.  This can also be done with a cash payment based on yield and then price at an elevator or averaging multiple pricing dates. 
  • Flexible rent based on price only: The rental payment is based on crop prices.  Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to.  Rental payments can be made at the quarterly price setting times or half and half or after harvest.
  • Profit sharing flexible rent agreements: The landlord and the tenant share the profit from the farmland.  This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.

Flexible rental agreements can be a good way to share yield and price risks between the landlord and the farmer.  If prices and yields are low, the landlord receives only the base payment, but if yields and or prices improve the landlord will receive a higher payment in fall sharing the extra income with the farmer.

Wednesday, April 15, 2015

Profitability of Dairy Farms in Minnesota

A recent analysis of the profitability and viability of dairy farms in Minnesota indicates that total family income on these operations is greater than US median Income.  FinBin data, supported by the Center for Farm Financial Management, was utilized in this analysis. 

Monday, April 13, 2015

2014 FINBIN Report on Minnesota Farm Finances



Crop farms and livestock farms had very different years in 2014 based on analysis of the 2183 farms that participated in Minnesota farm business management programs.  The median income for all farms was $43,129, up 3% over 2013.  But this small change hides major differences in the earnings of the diverse sectors of Minnesota’s farm economy.   

Crop farmers, for the second consecutive  year,   suffered  a  steep decline in earnings, while many livestock producers had one of their best years ever.  The 2014 FINBIN Report on Minnesota Farm Finances provides a full summary of 2014 results.  Data is provided by MnSCU Minnesota Farm Business Management and the Southwest Minnesota Farm Business Management Association.

Wednesday, April 1, 2015

2014 Minnesota Farm Income Report

Strong prices and lower costs brought record profits to many Minnesota livestock farmers in 2014, while crop producers saw earnings deteriorate for the second consecutive year.

Those were among key findings in the annual farm income analysis conducted jointly by Minnesota State Colleges and Universities (MnSCU) and University of Minnesota Extension. Researchers pointed to signals that both livestock and crop producers, however, will face tougher times this year.

Overall, the median net farm income for farmers included in the study was $43,129, up 3 percent from 2013 but substantially lower than record profits earned in 2012. The median income for crop farms was slightly more than $17,000 while the median for all livestock producers exceeded $138,000. Net farm income includes the farm's contribution to family living expenses, income taxes, retirement and business growth. "The public needs to recognize that these farms are businesses that need to earn a return on their investment as well as feed their families from these funds," says Keith Olander, director of AgCentric at MnSCU. The average farm in the study earned a 4% return on their investment in 2014.

"Minnesota crop and livestock farms have been on different paths for several years now," said Dale Nordquist, University of Minnesota Extension economist. Over the past few years, crop farms benefited from the run-up in commodity prices. But prices for Minnesota's primary crops were generally below cost of production in 2014. Conversely, livestock producers, who struggled with high feed costs and low prices over the past several years benefited from lower feed prices as corn and soybean prices fell. At the same time, meat and milk prices hit all-time highs in 2014, resulting in many livestock farmers having their best year ever.

Crops: Prices and yields fall

Most of the attention in farm country has been on declining crop prices in the past year.

  • The average price received for corn sold by participating producers declined from $6.28 per bushel in 2013 to $4.37 in 2014. With costs of production averaging $4.57, the average corn producer lost money on each bushel of corn produced. 
  • Soybeans sold for $11.67 per bushel, down from $13.59 the previous year. 
  • Wheat sold for $6.33 per bushel compared to $7.66 in 2013. 
  • Sugar beet producers in the Red River Valley and West Central Minnesota did not fare any better. In 2012, the average value of beets was $64 per ton. By 2014, it had fallen to $35 per ton. The average producer lost $230 on beets in 2014.


In much of the Corn Belt, record crop yields at least somewhat compensated for decreasing prices. But the growing season didn't do Minnesota farmers any favors. The average corn yield for participating farms was 158 bushels per acre, down 9 bushels from their 10 year average.

"Most Minnesotans remember how cold and wet last May and June were," Nordquist said. "That got the corn crop off to a really slow start and we never totally recovered. There is no bright light at the end of the tunnel for most crop producers, either. Things could change but at current prices, most crop farmers will be struggle to get their costs of production out of the market this year."

A possible bright spot?

"Sugar beet producers have really struggled for the past two years due to reduced prices mostly caused by excessive amounts of foreign sugar coming into the United States" says Ron Dvergsten, of MnSCU Farm Business Management. "It does look like the trade issues will be resolved in the near future and should provide for higher sugar prices in 2015," Dvergsten said.

Livestock: Record profits in 2014 appear short-lived

The story was much better for beef, pork and milk producers. As crop prices declined over the past two years, so have feed prices. At the same time, prices for meat and milk increased dramatically. The average price received for milk increased from $20.36 per hundred pounds in 2013 to $24.42. With the average cost of production around $20.00, dairy producers netted about $1,200 per cow compared to $300 in 2013.
Beef and pork producers experienced much the same results. The price of market weight beef increased from $1.25 per pound in 2013 to $1.51 in 2014. Lean pork prices increased from 89 cents per pound to $1.01.

"Beef supplies are still struggling to recover from the 2012 drought so beef prices look to remain strong for at least another year," says Nordquist. "But 2015 does not look like it's going to be kind to dairy and pork producers. Milk prices have already declined below the cost of production and futures prices for pork are much lower for coming months."

The analysis used data from 2,036 participants in MnSCU farm business management education programs and 105 members of the Southwest Minnesota Farm Business Management Association. The total number of commercial farms in Minnesota, those that sold over $100,000 worth of ag products is approximately 25,000. The statewide results are compiled by the Center for Farm Financial Management into the FINBIN database which can be queried at www.finbin.umn.edu.

Monday, March 16, 2015

How do farmers survive a year without profits?

By David Bau, Extension Educator

Forward contract bids for 2015 corn and soybeans are $3.50 and under $9.00 respectively. Farmer breakeven prices necessary to cover input costs and living expenses are in the $4.50 to $5.00 range for corn and $11.50 to $12.50 for soybeans, which means if prices do not improve, many will have losses on 2015 crops. Losses started for many in 2013 when over half the corn producers lost money on corn production and twenty percent of soybean producers in the Southern Minnesota Adult Farm Management programs. On average they sold their 2013 corn for $4.45 and 2013 soybeans for $9.47 and the average breakeven prices were $4.78 for corn and $11.69 for soybeans.

The first thing many farmers have done is they saved the good time profits from prior years in their balance sheets. This will allow them to weather a poor or a no profit year in 2015. But what else can a farmer do?

On the income side, the new farm bill program is designed to help when prices are low and yields are poor depending on which program is used. This will help cover part of the potential losses with potential payments of $70 per base acre for corn and $45 per base acre on soybeans in 2015 average this across all planted will vary with amount of farmland that is covered by program crop base acres. If I use 75% of land is covered by base acres this would lower the payment across all planted acres to $52 for corn and $34 for soybeans and using yields of 175 for corn and 50 bushels per acre for corn, the breakeven price would be lowered by 30 cents and for soybeans 68 cents.

If using average 2015 breakeven prices of $4.75 for corn and $12.00 for soybeans, after farm bill projected revenue the breakeven is now $4.25 for corn and $11.38 for soybeans. A farmer can carry good coverage levels of crop insurance, with a revenue product that will protect them if either price or yields are down in 2015. They can also monitor the markets and market their crops if prices recover to levels that will allow them to make a profit.

Where can a farmer cut costs in 2015? The table below lists the input cost as percentage of direct costs with the exception of depreciation which is compared as percentage to direct and indirect costs. The top three for corn are land rent, fertilizer and seed accounting for 72.8% of direct cost. For soybeans the top two inputs are land rent and seed which account for 65.4%. Land costs are the largest cost for both commodities for the last ten years. Land rent costs accounted for 30% of the direct costs for corn and 48.5% for soybeans so you can see projected costs for rent for both budgets is about this 10 year average. The actual rental rent used in the budget was $250 well below what many Southern Minnesota rental agreements are at. If I used the 10 year average rent for corn would be $230 and $231 for soybeans.

corn.soybeans.png

Yields are the most important factor in determining the previously mentioned breakeven prices so the challenge for the farmer is to examine if there are any input costs that if cut will have the least impact on yield.


Friday, February 27, 2015

Farm Resource Guide Available

By David Bau, U of M Extension Educator

The Farm Resource Guide for 2015 is now available upon request at many University of Minnesota Extension County offices across the state. It includes a variety of very useful farm business management information. The front of the Guide has the most frequently requested information on Custom Rates, Rental Rates for various ag commodity, forages, bins and buildings, Farmland Sales and Rents and Pasture Rental rates. There are lease forms for Cash Rent and Share Rent arrangements if you order a compact disc or e-mail version. There is flexible rental arrangement information. Marketing information including the cash price probabilities for cash corn and soybeans for Worthington, Minnesota, since 1974. Information from the Southwest Farm Business Management Association includes trends in costs, family living and net worth changes. At the end of the Guide is a section on Feedlot Rule Highlights and information on Manure Agreement and Easements, including examples of Manure Spreading Lease and Land Application Agreement forms.

Included are the average cash prices for corn and soybeans to use as a benchmark along with statewide listing by county of the last five year average yields for corn and soybeans. Statewide cropland rental information is available for counties with significant farm numbers in Adult Farm Management. Farmland sales information is available for all counties across Minnesota. A second study lists bare farmland sales from 14 counties in southwest Minnesota. There are many pages of information and forms which would be of benefit to the entire state including: custom rates; lease forms; commodity price probabilities for corn, soybeans, alfalfa hay, straw, grass hay, hogs and cattle.

This Resource Guide is available for a $25 fee plus postage and sales tax if you would like to have your own copy. I can provide you the information in your preferred format: (e-mail cost $26.72, CD cost $28.50 or hard copy cost $30.00). The small $25 fee will help fund continued Extension efforts in Agricultural Business Management and will allow me to continue with the project and update the Resource Guide for 2016.

If you would like your own copy of the Farm Resource Guide, please e-mail me at bauxx003@umn.edu or give me a call at 507-372-3900 ext. 3906 and let me know what form you would like to receive the Farm Resource Guide in. I will send out the materials and an invoice as soon as possible. I hope you find the Resource Guide useful and would welcome your feedback on what you would like included in next year's Guide.


Farmland Values Decline in 2014

By David Bau, U of M Extension Educator

At the end of each year for the last twenty years, a survey has been conducted of farm land sales in fourteen southwestern Minnesota counties in which land values have been on a steadily increasing until 2014. The survey reports bare farm land sales to non-related parties for the first six months of each year. After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014. Data collected in this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine Counties. This year the decline across the fourteen counties averaged 10.1%. Average land values had not declined since 1996 when the average SW Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 to $8,466.

Data from these counties indicate prices decreased from an average of $8,466 in 2013 to $7,556 in 2014 or an decrease of 10.1%. This is the first percent decrease as far back as this data has been collect since 1995. In 2013 was the largest year to year increase of 35.6%. Farm land prices decreased in the fourteen counties and from an overall average of $8,466 per acre in 2013 to an average of $7,556 in 2014. There was a lot of variability in the numbers from 2013 to 2014. The largest increase was in Redwood County with an increase of 9.2% while Lac qui Parle County experienced the largest decrease of 26.7% for the sales that met the bare farmland to non-related party transaction.

Twelve of the counties experienced a decline in farm land values in 2014 from 2013. Rock County had the highest average sale price of $9,353 per acre and Lac qui Parle the lowest at $4,251 per acre. The average Crop Equivalency Rating (CER) for the fourteen counties was 68 with the highest price per CER in Lyon County at $123.63 and the lowest in Lac qui Parle County at $77.11 per CER. The assessed values for the first time were higher than actual sales price with the assessed value at 102 percent of the sales price. Historically the assessed value would be 75 to 80 percent of the sales value. Eight counties experienced average sales prices that were lower than the assessed values in 2014. While six counties experienced average sales prices that were more than the average assessed values, the highest percentage was 92% in Watonwan County.

Each year sales vary within a county and be closer to a larger city which would have an effect on these average values from year to year. The quality of the land sold within a county may be a factor in the wide swings in the prices from year to year in individual counties. The number of sales in each county varies greatly from year to year. The 10.1% decrease is well below historical increases of 1 to 2 percent. For the last ten years there have been large percentage increases. In the previous eight year prices increased at an annual rate of 15.3%. There are several factors that have an effect on land values. Farm incomes, grain prices, interest rates, return on other investments and 1031 exchanges are often mentioned as reasons for the increase. Farm profits were weaker in 2013 and will decline further in 2014 with lower commodity prices. There were three consecutive years with record farm profits in the Southwest Minnesota Adult Farm Management program, from 2005 through 2007. In 2008 and 2009 profits were good, but not at record levels, 2010, 2011 and 2012 were record levels. In 2013 half the farms in adult farm management in Southern Minnesota lost money on corn production. This loss will increase for 2014. Many hog and dairy producers experienced a tough year in 2010 many with losses instead of profits with poor prices for their commodities and high feed costs. In 2014 lower commodity prices and higher livestock prices will have a positive effect on livestock producer profits.

If the average farmer had a loss in 2013 and this trend continues in 2014, this would soften local demand for the land from farmers. Interest rates continue at historically low levels and land rental income is comparable or higher than what an investor can earn from treasury bills, bonds or certificates of deposit at financial institutions. The stock has market rebounded significantly since its low in March of 2009 to record levels at the end of 2014. The 1031 exchange is for farmers or property owners who have land in an area of increased value due to location to city or development and rather then pay taxes on large gains from the sale of land they purchase like property or other farmland at a more reasonable price elsewhere, which increases rural farmland demand.

The reason for increases or decreases in farm land sales prices is a combination of all of these factors. If you would like a copy of the two page document on the trends in farm land sale prices, contact your local county Extension office at any of the fourteen counties listed above.

Which direction will farm land values go depend on several factors? Supply and demand will determine this. The simple return on investment which is determined by rental rates will determine how competitive farm land is compared to other investments and this will determine a value for farm land. Corn and soybean prices for 2015 crop are much lower than previous years. This should have an impact on profits, farm rental rates and eventually farmland values. The government programs have an influence as well through the farm bill. If interest rates rise or farm rental rates fall, the value of land is sure to be affected in a negative way and that will cause a decrease in land values. The table below indicates average land prices from 2010 to 2014.

Table2.png

  • Copyright 2015 Regents of the University of Minnesota. All rights reserved.
  • The University of Minnesota is an equal opportunity educator and employer. Privacy