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Extension > Agricultural Business Management News > 2013

Wednesday, November 27, 2013

Searching for a Fair Rent for 2014

Kent Olson, Extension Economist
After the recent years of high crop prices and low interest rates, land prices and rents have risen to new heights. But now, with the recent drop in crop prices and the stickiness of land rents not falling as quickly as crop prices, many farmers are feeling the squeeze once again between revenue, costs, and rent. This is painting an unhappy, perhaps tense picture for both tenants and landowners as rents are discussed and negotiated for 2014.

As a first step in rent negotiation, let's look at what each side sees from their viewpoint.

As a base, we'll start with the projected returns and costs for growing corn in 2014 in west central Minnesota (Table 1). This projection is based on the 2012 production records for west central Minnesota, recent NASS data on prices paid by farmers for inputs, and CBOT futures prices. (Details are in the footnote for the table.)

Based on this projection, an owner-operator is projected to face a loss of $180 per acre. This may be a "paper" loss. The owner-operator does not necessarily face financial trouble immediately, but they would not receive their desired returns for labor, management, and equity in land.

To understand what a tenant and a landowner face individually, we split the owner-operator revenue and costs into two columns: one for the tenant and one for the owner.

In a traditional cash rent lease, tenants receive all the revenue and pay for all direct expenses of growing the crop, their overhead costs, and rent to the landowner - plus they have an expectation of receiving some income for unpaid labor and management ($70 per acre in this example). In the tenant's column for cash rent, the tenant's share of revenue and expenses is projected to provide a net return of $108 per acre before any land rent is paid. Thus, these cost and revenue projections indicate the maximum cash rent the tenant can pay (and still pay all other expenses plus their expectation for labor and management) is $108 per acre.

The astute reader who knows the current land rent market can already see a problem coming.

Landowners do not receive any revenue from production in a traditional cash lease and do not pay for any production costs. Landowners do have overhead expenses such as real estate taxes and insurance plus they have an expectation of a return to the value of the land from production ($240 per acre in this example). In the owner's column for cash rent, the landowner is projected to have expenses of $288 per acre before receiving any rent revenue. Thus, these projections indicate the minimum cash rent the landowner wants is $288 per acre in order to pay all expenses plus their expectation of a return to their land.

There is a large difference between the tenant's negotiating position and the landowner's negotiating position in this projection. The tenant has a maximum of $108 per acre for land rent, and the landowner wants at least $288 per acre for land rent. This does not create an easy negotiation situation--perhaps a mild statement.

Current land rents are much closer to what the landowner wants and not near what the tenant is projected to be able to pay. Even if the tenant was willing to receive no income for his or her labor and management (instead of $70), the tenant's maximum cash rent would be $178. So what do the tenant and landowner do?

One quick answer is for this landowner to look for a tenant willing to pay $288 or more. Given the financial position of many farms, some tenants may be willing to pay a rent this high or higher in 2014. I hear some have. This projection says they will be losing money in 2014 on this rented land. But this loss may not create financial devastation for the farm if they have sufficient cash reserves. Perhaps their long run view says this loss is necessary in 2014 in order to increase the farm size for future years. Perhaps these farms have already priced their crops at prices higher than current future prices indicate.

But crop price projections do not indicate a foreseeable return to levels to the levels of recent years. So, how long can (or should) a tenant continue to pay a cash rent higher than the tenant is able to sustain into the future?

The current tenant may not want to lose acreage so signs the owner's lease agreement for the high rent even though they know they are losing money ($180 per acre in this projection). Again, how long can this be sustained? When should the tenant decide to pursue other income alternatives because the expected returns to labor, management, and equity are greater in those alternatives?

Another answer (for 2014 or a subsequent year) is for the tenant and landowner to accept that crop price levels have changed and both the land market and land rental market are likely to change or have changed. Then the two parties can negotiate over what their expectations are.

The tenant will have to change their expectation for returns to labor and management to less than $70. The landowner will have to adjust their estimated land value and expected rate of return to less than $240 per acre. These are the residual returns after other expenses are paid. The amount of adjustment each party has to make will depend on the competitiveness of the rental market and which party has more bargaining power.

The negotiation centers on these two expectations because they are the "softer" numbers in the budget compared to the "harder" estimates of what the cost of the fertilizer will be, for example. The tenant and landowner will likely not talk openly between them about these expectations, but they are what they will be adjusting as they negotiate.

We could say the tenant should adjust production practices (and thus costs) or increase yield to be more economical. But farmers know their land and are choosing cropping practices that are economically optimal or close to that. Some lax management may have crept in during the recent years of high prices, but it's not the $180 difference in this projection. I don't know any farmers who do recreational tillage or recreational fertilizer applications.

Another answer to this current situation may be to change the form of lease.

Instead of a cash lease, the landowner and tenant could choose to sign a share lease or some form of flexible cash lease. In a share lease, if the production and the direct production costs (including drying) were shared 50-50, the tenant paid all machinery costs, and both parties paid their overhead costs, the projection in shows the tenant paying 48% of the total costs and the landowner paying 52%. So, a 50-50 share lease is probably fair given the uncertainty of prices and yields.

However, if these projections became the actual numbers in 2014, both parties would have losses under a share lease. The tenant would not receive any return to labor and management and lose another $6. The landowner would not obtain the desired return to the value of land.

Moving to a share lease or other form of flexible lease may be needed to provide both parties the ability to survive this period of adjustment to new market conditions.


Thursday, October 31, 2013

Workshop: What is a fair and profitable farmland rental agreement?

Join University of Minnesota Extension for this workshop designed to assist land owners, farmers, and agri-business professionals with farm financial issues related to farmland rental rates, ownership, management, leasing agreements, and other matters.

Meetings will be held throughout southern and central Minnesota at no cost. View meeting dates and locations for central Minnesota and southern Minnesota.

MEETING DETAILS
The meetings are sponsored by the University of Minnesota Extension and will last approximately two hours.

Presenter: Dave Bau, Ag Business Management, Extension Educator

MEETING AGENDA

  • Farmland rental rate trends

  • Land values

  • Increasing input costs

  • Landlord worksheet

  • Tenant worksheet

  • A rental rate that works, Excel spreadsheet

  • Flexible leases

  • Rental lease examples

  • What is a fair rental agreement?

Who should attend:

  • Landlords and farm land owners

  • Farmers and tenants

  • Agri-businesses

  • Ag professionals

Make plans now to attend one of these free informative meetings.

In case of inclement weather, please contact the Farm Information Line at 1-800-232-9077.

For more information, please contact Dave Bau at 507-360-0664 or bauxx003@umn.edu.

View meeting dates and locations on our calendar.

Tuesday, October 22, 2013

Minnesota gift tax effective July 1, 2013

Gary Hachfeld

MANKATO, Minn. (10/22/2013) - As a result of the 2013 Minnesota legislative session, Minnesota now has a state gift tax effective July 1, 2013. The rules follow many of the federal gift tax rules with a few differences. The gift tax also has implications regarding the state estate laws and tax.

The Minnesota gift tax allows for an annual gift exclusion of $14,000 per person per individual per year to any number of persons without any tax. Couples can combine their gifts for a total of $28,000 per recipient if the spouses own the asset together, write separate checks for $14,000 each or file an IRS 709 and Minnesota gift tax form. In addition, each individual is allowed a lifetime gift exclusion of $1,000,000 which represents a lifetime gift tax credit of $100,000. Couples can combine their lifetime exclusions as well. Gifts in excess of the annual exclusion amounts will require the donor to file an IRS 709 and Minnesota gift tax form. Gifts in excess of the lifetime exclusion amount will also have to file the gift tax forms and the gift will be taxed at a flat rate of 10 percent.

The value of gifts exceeding the annual exclusion amount made within 3 years of a decedent's death will be added back into the decedent's adjusted taxable estate to determine if Minnesota estate tax is due. This provision is retroactive applying to estates of decedents dying after Dec. 31, 2012. The good news here is the amount of estate tax due is reduced by the amount of gift tax paid on any gift added back into the decedent's adjusted taxable estate.

The Minnesota gift tax only applies to the transfer of property located in Minnesota. It applies to Minnesota residents but also to gifts of real estate and tangible personal property located in Minnesota but owned by any non-resident. Minnesota residents who gift real or tangible personal property located outside the state are not subject to the Minnesota gift tax.

Any gift tax due is the responsibility of the donor. However, if the gift tax is not paid when due, that recipient of the gift is responsible to pay the tax. The tax is due by April 15 after the close of the calendar year in which the gift was made. There are some exceptions if the donor dies.

The Minnesota lifetime gift tax exclusion amount of $1,000,000 per person is in addition to the Minnesota estate tax exclusion of $1,000,000. Keep in mind there is also a Minnesota Qualified Small Business Property and Qualified Farm Property Exclusion for estates that qualify. It is important to check with your accountant and attorney for information about these issues specific to your situation. Professional assistance is crucial to effective gift and estate planning.

Homestead classification key to Minnesota $4 million estate exclusion

Gary Hachfeld

MANKATO, Minn. (10/22/2013) - During the 2011 Minnesota legislative session, state lawmakers initiated a Qualified Small Business Property & Qualified Farm Property Exclusion. This $4 million dollar Minnesota estate tax exclusion for qualified small business and qualified farm property was signed into law July 2011 for decedents dying after June 30, 2011. Legislative law tied qualifying for the farm property exclusion to maintaining homestead classification on the farm land. If homestead classification is lost before the decedent's death, the estate will not qualify for the additional exclusion.

Many folks feel qualifying is not going to be a problem and is a panacea for eliminating Minnesota estate tax upon their death. However, without planning there could be major issues. There are several scenarios where the decedent could lose homestead classification and therefore not qualify for the exclusion. Those scenarios include: 1) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent rents the land to a tenant unrelated to them, 2) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent crop-share rents the farm land, 3) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent custom farms the land and 4) landowner either lives on the farm land or in town within 4 contiguous townships of the farm land, has placed the farm land in an entity and rents the land to a son or daughter who is not a member of the entity. These scenarios will render the estate ineligible for the $4 million exclusion.

If the decedent lived on the farm and farmed the land, rented the land to a farming child or rented the land to an unrelated party, they will have maintained homestead classification. If the decedent moved to town but remained within 4 contiguous townships of the farm land and they had a farming child farm the land, whether the child lives on the farm or not, they will have also maintained homestead classification. Maintaining homestead classification would qualify the estate for the additional estate tax exclusion.

This is an area that can cause huge and unnecessary estate tax issues if done incorrectly. When doing estate and business transition planning, seek the assistance of a competent attorney. Farm families today have a lot at risk. Seeking professional help will secure the future of their business and personal assets.

Should I have a Will, a trust or both?

Gary Hachfeld

MANKATO, Minn. (10/22/2013) -- Personal estate planning is a critical part of life, especially when transferring a farm business to the next generation. However, recent survey data from four states shows that over 69 percent of farm family members do not have an up-to-date personal estate plan. Part of the reason is confusion around the differences between a Will and a revocable living trust.

A Will and a revocable living trust are instruments that will direct your assets to the individuals, a business entity, organizations, or charities upon your death. You do not need both. One or the other will suffice. The choice of which instrument to use should be based upon your estate planning goals. Each instrument has specific traits.

A Will triggers the probate process. The parameters vary by state but in Minnesota, probate occurs when the decedent owns $50,000 or more of assets or any real estate. Probate is a court supervised process. In Minnesota it takes 12-18 months on average to complete. Court and attorney fees cost, on average, 2-3 percent of the estate value. The process is also open to the public in that anyone can obtain a copy of the decedent's probate records by requesting copies from the decedent's county of residence. These records list the decedent's assets and their value on the date of death. Within the Will, an individual can list how they want their assets distributed upon their death. They can also list a guardian and conservator if they have minor children. Upon death, the decedent's assets receive an increase in basis to fair market value. A Will does not allow for protection of assets from lawsuits and other adverse actions nor does it allow an individual to do disability planning.

Assets in a revocable living trust do not go through the probate process and therefore are closed to the public. The trust must go through an administrative phase to distribute assets but this process takes much less time and generally costs much less than probate. Think of a revocable living trust as a bucket. You place all your farm and non-farm assets into this bucket. You still own the assets so you can add assets to the trust or take assets out and sell or trade them. There is no change in your tax status. Upon your death, the assets receive an increase in basis and pass to your heirs as directed in the trust document. A revocable living trust also allows you to pass assets to an heir via a "protected trust" which shelters the assets from lawsuits and other adverse actions. The trust also enables an individual to do disability planning, a process whereby you outline how you want to be cared for in the event of a disability or incapacitation. A key step in establishing a trust is "funding" the trust. That is, titling all assets with a title into the name of the trust. If this is not done, the assets are required to pass through the probate process. The revocable living trust can allow for much more flexibility in your personal estate planning than does a Will.

In addition to a Will or revocable living trust there are three additional documents required to complete the estate planning process. The first is durable power-of-attorney. Durable means the power continues if you become disabled and cannot make your own decisions. Second is the health care directive where you list how you want to be cared for if you become disabled or death is eminent. Third is listing your Health Insurance Portability and Accountability Act (HIPAA) authorized individuals. These are people you grant access to your medical records and documents. If you are unable to convey your own medical information, the medical care facility will not share this information with anyone unless you have granted them HIPAA authority.

Personal estate planning is an important process. Whether you chose a Will or a trust is less important than getting the process done correctly. Laws are changing constantly so seek qualified legal assistance when completing and implementing your personal estate plan.

Thursday, October 10, 2013

Trends in farmland rental rates for 2014

By David Bau, Extension Educator
University of Minnesota Extension

What are the trends in farmland rental rates and where are they going in 2014? There are many places to find relevant information. The "Cropland Rental Rates for Minnesota Counties" publication prepared by Gary Hachfeld, William Lazarus, Dale Nordquist, and Rann Loppnow utilizes the FINBIN data base with historic information from an adult farm management data base. You can find the publication at two different websites: the Center for Farm Financial Management website under publications, and the Southwest Research and Outreach Center website under research and outreach.

The Minnesota Agricultural Statistic Service cropland rental information is included in the annual bulletin. It can be found online (once the federal government shutdown ends). Another annual publication by the Minnesota Agricultural Statistic Service on cash rent is released in September each year.

Iowa completes a statewide survey of farmers and landlords that can be found at the Iowa State University Extension website.

In the "Cropland Rental Rates for Minnesota Counties" publication, the average annual change in rental rates by region from 2011 to 2012 from FINBIN data indicated a 8.9% increase in Northwestern Minnesota, 18.4% increase in West Central, 13.4% increase in Central, 18.0% increase in Southwest, 19.9% increase in South Central and 18.6% increase in Southeast Minnesota. Combining the regions, it would be a 17.8% increase in farmland rental rates across Minnesota from 2011 to 2012, up from the 13.1% increase the previous year.

The Minnesota Agricultural Statistic Service indicated an 11.1% increase across Minnesota from 2011 to 2012 and an 18.0% increase from 2012 to 2013. The Iowa survey data indicated in 2013 the average Iowa farmland rent increased to $270 up from the $252 average in 2012 and from $214 per acre in 2011, with all 9 districts recording an increase in average rental rates.

Cropland rental rates can vary significantly due to many factors including crop returns based on current grain prices and projected yields, land quality, tile and drainage on the farmland, the federal farm program, previous crops, herbicides and fertility, use of facilities, length of contract and other factors. In the "Cropland Rental Rates for Minnesota Counties" publication, you can also see the average rents for the bottom 10 percent and the top 10 percent to give you a range of rents paid in the county along with the median rent for each county. This publication is a helpful tool to use when determining rental rates.

The continued high prices in the grain markets continue to put pressure on rental rates to increase for 2013 but the current prices for 2013 and 2014 corn are much lower than one year ago. On October 11, 2012 Lamberton, MN cash bid for 2012 corn was $7.38 and for 2013 corn $5.79 as of October 9, 2013 the cash bid for 2013 corn was $4.18 and for 2014 corn $4.35. Assuming 175 bushels of corn produced in each year, with all crop sold out of field, the gross revenue would be $1,291.50 for 2012, $731.50 for 2013 and $761.25 for 2014.

Southern Minnesota actual yields were lower than 175 in 2012 and maybe higher in 2013, but yet to be determined for 2014. The total expense, including direct and overhead expenses, to produce an acre of corn in 2012 for over 1000 southern Minnesota farmers was $778.63 per acre paying $200 per acre rent. If a farmer achieves 200 bushels in 2013, gross revenue per acre would be $836, if expenses stayed constant, the farmer would make $57.37 profit. But for the last 10 years input costs have increased 9 percent per year, so the $778.63 expense for 2012 would increase to $848.71 in 2013, below the total revenue projection. If you apply the 9 percent again for 2014 total expenses would be $925.09 with total revenue projected at $761.25 for 2014. This would indicate a loss of $163.86 per acre.

Soybeans expenses in 2012 were $472.23 with rents at $192 per acre. Using a 7 percent increase in input costs, the average increase for past 10 years for soybeans, 2013 expenses project to $505.28 in 2013 and $540.66 in 2014. Lamberton, MN soybean prices on October 11, 2012 were $14.72 for 2012 soybeans and $12.68 for 2013 beans, while on October 9, 2013 prices were $12.43 for 2013 and $11.06 for 2014. Using these prices with assumed yield of 48 bushels per acre, gross revenue would be $706.56 in 2012, $596.64 in 2013 and $530.88 in 2014. So beans make a profit in 2012, 2013 but have a loss of $9.78 for 2014.

The average rents for the fourteen counties in Southwest Minnesota were $160 in 2010, $177 in 2011 and $209 in 2012. For the previous five years, rents in Southwest Minnesota have increased an average of 12.1 percent each year. If you apply a 12.1% increase for 2013 the average goes up to $234 and for 2014 using 12.1% percent increase again, applied to 2013 rate, the average rent for Southwest Minnesota would project to $263 for 2014.

Can farmland rents continue this increasing trend in 2014? The projected 2014 corn and soybean total income and expenses would indicate a loss at current cash forward contract prices available using historic yields. If prices increase or farmers are able to get better yields in 2014 than projected, it would be possible to pay these trending higher rental rates, but based on the current corn and soybean prices for 2014, there is a real potential for farmers to lose money. If this occurs it should cause lower or flat farmland rental rates in 2014 as compared to 2013.

Monday, June 3, 2013

Prevented planting? Evaluating your options under crop insurance

Kent Olson, Extension Economist

Spring rains and flooded fields have delayed or prevented planting for many farmers in Minnesota. If farmers have multi-peril crop insurance and have not been able to plant by their crop's final planting date, they do have options.

For most of Minnesota, the final planting date for corn is May 31. For the northern counties it is May 25. The final planting date for soybeans in Minnesota is June 10. The late planting period extends for 25 days after the crop's final planting date.

If a farmer was unable to plant corn on or before May 31 (in most of Minnesota) because of an insurable cause of loss, the farmer may:

  • Plant corn during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date. (But planting corn in Minnesota after June 10 is not recommended due to potential frost before harvest.)

  • Plant corn after the late planting period, that is after June 25. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage. (Again, planting corn after June 10 is not recommended.)

  • Plant soybeans on the land intended for corn before June 25 with full insurance coverage for the soybeans (but no prevented planting payment for corn).

  • Not plant a crop and receive a prevented planting payment.

  • Plant a cover crop and receive a prevented planting payment.

  • After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the corn.

If a farmer is unable to plant soybeans on or before June 10 in Minnesota because of an insurable loss, farmers have a similar set of options. They may:

  • Plant soybeans during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date.

  • Plant soybeans after the late planting period, that is after July 5. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage.

  • Not plant a crop and receive a prevented planting payment.

  • Plant a cover crop and receive a prevented planting payment.

  • After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the soybean.

The first step for farmers is to contact their crop insurance agent to review their policy and options before making a decision.

Farmers and their advisers can use a worksheet developed by Iowa State and adapted for Minnesota by Kent Olson to evaluate their options when prevented from planting. The worksheet also helps in the evaluation of whether to replant or not. The worksheet is available here: DelayedplantingevaluatorMinnesota.xls

USDA's Risk Management Agency's (RMA) information on final planting dates and other crop insurance information can be found at http://www.rma.usda.gov/aboutrma/fields/mn_rso/. RMA defines prevented planting as a failure to plant an insured crop with the proper equipment by the final planting date designated in the insurance policy's actuarial documents or during the late planting period, if applicable, due to an insured cause of loss that is general to the surrounding area and that prevents other producers from planting acreage with similar characteristics. More information can be found on RMA's Prevented Planting fact sheet at http://www.rma.usda.gov/fields/mn_rso/2013/2013preventedplanting.pdf.

Thursday, May 23, 2013

Choosing ACRE or DCP: The view in late May

Kent Olson, Extension Economist

Earlier this month, the choice between the Average Crop Revenue Election (ACRE) program and the Direct and Countercyclical Program (DCP) seemed to be tilting towards signing up for DCP in 2013. Now in late May, that tilting towards DCP has strengthened for Minnesota farmers after the rapid planting rate, the improvement in soil moisture in Minnesota, and the recent upward price movements in future prices.

The rapid planting rate during May and the soil moisture improvement have made it harder to argue that yields will vary widely from averages and trends. So, ACRE payments appear to depend more on the future prices for the crops being planted now. The recent improvement in future prices for the new crop suggest that prices will not be at levels that make the actual state revenue below the benchmark.

Using trend yields for the state yields and historical yields for individual farms, my analysis of 17 example farms across Minnesota show that the breakeven Marketing Year Average (MYA) prices for individual crops are estimated to be about $4.35 per bushel for corn, $10.90 for soybean, and $5.35 for wheat. These are not absolute, but they do give us some information for decisions. If MYA prices were to drop below these price levels (and yields were at trend levels), the ACRE program would likely make a payment larger than the required 20% cut in direct payments under ACRE. If the MYA prices end up higher than these estimated breakeven prices, the DCP program would be the best program for the farmers.

Looking at recent history, the MYA price has tracked the Chicago futures price very closely for the December contract for corn and wheat and November for soybean. In late May, the Chicago price is over $5 for corn, over $12 for soybean, and over $7 for wheat. These are well above the breakeven prices I estimated for the 17 example farms. If these prices hold and yields are close to average levels, the DCP program would be the best choice.

However, there is still uncertainty on actual state and individual farm yields. So every farmer still needs to evaluate his or her own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013.
Farmers and their advisers can use a worksheet provided by University of Minnesota Extension to help them evaluate their situation for the 2013 decision.

As noted before, the extension of the 2008 Farm Bill opens up the decision to participate in either of the safety net programs: ACRE or DCP. Farmers have until June 3, 2013 to sign up for the ACRE program and August 2, 2013 for the DCP program.

Under the earlier rules of the 2008 Farm Bill, farmers who signed up for ACRE had to remain in ACRE through 2012. The extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013.


Friday, April 26, 2013

ACRE vs. DCP in 2013

Kent Olson, Extension Economist

The extension of the 2008 Farm Bill opens up the decision to participate in the Average Crop Revenue Election (ACRE) program or the Direct and Countercyclical Program (DCP). Under the earlier rules of the 2008 Farm Bill, if a farmer signed up for ACRE, they had to remain in ACRE through 2012. But the extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013. (Farmers do have the option to not sign up for either program, but this is not a sensible choice for 2013 in almost all cases.)

Farmers have until June 3, 2013, to sign up for the ACRE program and August 2, 2013, for the DCP program.

The 2013 decision to sign up for ACRE involves some uncertainty because the drought of 2012 has cast doubt on the potential yields for 2013 and thus the potential market prices. Plus, changes in the demand side for grains may have weakened the market's ability to absorb higher production at current price levels.

At this point in late April, the decision seems to tilt towards the sign up for the DCP in 2013. As we learn more about the planting season and potential production levels and price movements, this situation may change. So farmers need to pay attention to these changes and make their final choice between ACRE and DCP closer to the deadline of June 3.

Due to this uncertainty and their individual situations, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013. Even if they had signed up for ACRE previously, they can change their choice under the extension of the farm bill for 2013.

Farmers and their advisers can use this Excel worksheet to help them evaluate their situation for the 2013 decision.


Monday, March 25, 2013

A flexible land rental agreement benefits in a dry year

By David Bau, Extension Educator, University of Minnesota

Farmland rental rates have increased dramatically the last few years as commodity prices have reached record levels and remained high compared to historic averages. But grain prices will go lower again, and rental rates often lag and do not decline as rapidly. This will leave farmers with high rental rates locked in, creating a loss for the year. A dry year producing lower yields will expand this loss; here the farmers bear all the risk. One way to share the risk and rewards with the landlord is to enter into a flexible land rental agreement. This will reduce the loss for the farmer and share more risk with the landlord.

In 2008, Iowa State Extension reported that nearly 12 percent of all cash leases were flexible. In Minnesota, less than 10 percent of leases are flexible. In a dry year, I encourage farmers and landlords to consider setting up a flexible agreement.

Flexible leases have several advantages:

  • The actual rent paid adjusts automatically as yields and/or prices fluctuate as determined by the agreement.

  • The yield and price risks are shared between the landlord and the tenant.

  • Owners are paid in cash so they do not have to be involved in the crop management decisions.

  • If the agreement includes base cash rent agreement with a bonus, FSA will consider the lease a cash rental agreement; therefore, all government payments would go to the tenant and not have to be divided.

  • In a dry year with lower yields, the farmer will only be locked into paying a base rent, which is usually lower than the typical cash rent.

Base rents vary by area, but in Southern Minnesota the range could be from $100 to $250. Then a flexible component is added 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 higher the farmer's risk. The lower the base rent, the higher the landlord's share of 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: This is a rental agreement where 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.


  • Base rents plus a bonus: This is a rental agreement where 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 as well.


  • Flexible rent based on yield only: This is a rental agreement where 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 the price at an elevator.


  • Flexible rent based on price only: This is a rental agreement where 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 agreed-to bushels. Rental payments can be made at the quarterly price setting times, half and half, or after harvest.


  • Profit sharing flexible rent agreements: This is a rental agreement where 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 percent to landlord and 50 percent to the tenant and some of the expenses are paid by each party.

If a farmer and landlord can come to an agreement on a flexible lease agreement, they can share in both the risk and reward. The lower base payment will reduce the farmer's loss in a short crop and/or poor price year caused by the drought conditions. If timely rains are received and/or prices are good, a farmer and landlord can both share in the additional crop and additional revenue caused by higher prices.

Monday, March 18, 2013

What can livestock producers do to protect against dry year costs?

By David Bau, Extension Educator, University of Minnesota

In dry years, livestock producers are exposed to increasing feed costs. Concurrently, liquidation from producers who have run out of feed--or who are reducing livestock numbers to match feed supplies--can cause prices for the finished product to go lower. What can livestock producers do in a dry year to protect against higher feed costs and less than profitable market prices?

Producers should constantly monitor their cost of production for their livestock enterprise. If the markets allow a producer to lock in a profit on the future contracts, they should do it. They still are exposed to varying local basis and quality premiums or discounts.

If the producer raises their own feed, they should still account for the current feed costs when looking at locking a profitable price for the finished commodity.

Locking in feed supplies and costs can also give producers some assurance in a dry year. If hay prices are going up, look at reducing the hay use in rations. Also look at locking in the hay supply required to get through the year as soon as possible because in dry/short crop years, hay prices will continue to rise as supply shrinks. Farmers should examine feed rations to determine if there are less expensive alternatives.

If a producer is using corn in their rations, and they have locked in a final profitable finished market price, they should also purchase the required corn supplies either on the futures board or with forward contracts with local elevators. If they are planning to raise the corn on their fields, what can they do when the drought conditions lower yields significantly? These producers can buy a call option on the December contract on a percent of the crop they are concerned they might not produce. Even in the last major drought of 1988, Minnesota yields were about half the normal year's yield, so farmers should be confident if they purchased calls on half of their normal corn production.

The producer needs to treat the cost of these calls as price insurance on the feed supply. So if the drought is severe and corn prices increase significantly, the call option's value will increase in a parallel fashion and the producer will be able to purchase the higher-priced corn with the profits from the call option. In 2012, the corn price increase of $3.50 in June and July with call options in place, a farmer would have profits on the call option that could be used to purchase the higher priced corn. Producers who utilize soybean meal could buy call options on November soybeans and have the same price insurance.

Farmers should try to source the physical crop in advance from the elevator, feed mill, or neighboring farmer.

Livestock producers could consider decreasing livestock numbers, culling less profitable livestock heavily, and weaning calves early. Producers should work with a vet and nutritionist to determine the lowest cost ration that will ensure optimal health and growth.

Thursday, March 14, 2013

How to market grain in a dry or drought year

By David Bau, Extension Educator, University of Minnesota

How should a farmer approach commodity marketing plans in a dry year? Last year was the driest year on record since the 1950s in the United States. Crops varied widely across the country, but Minnesota was fortunate to receive May rains and timely rains thereafter in parts of the state. Minnesota's average corn year led the country. Unfortunately, going into the 2013 crop year, Minnesota's sub soil moisture is at extremely low levels--much lower than the 2012 conditions. What can a farmer do to enhance their commodity marketing under these conditions?

Start by considering purchasing a higher level of insurance coverage. The majority of farmers purchase 75 percent coverage level and some form of revenue product that insures both yield and price. The prices for soybeans and corn are set at the average of the November and December futures contract during the month of February each year. The 2013 prices are set at $5.65 for corn and $12.87 for soybeans. A harvest price is set with the average of these future contracts for the month of October. The revenue insurance sets a total revenue guarantee at the APH (actual production history) multiplied by coverage level (75 percent), multiplied by the spring price (February average). If a farmer purchases a higher coverage level, they have purchased a higher total revenue guarantee that could cover expenses if below-average yields occur due to dry conditions.

A farmer should consider optional units over enterprise if their farmland quality varies significantly. With enterprise insurance, your premiums are much lower, but it requires crop losses across a broader region. Your whole-farm average yields have to be below your coverage level to get indemnity payments. While with optional units, if one or more of your fields have lighter soil, they would receive an indemnity payment on how each field performs--not your entire operation's average yields.

Pre-harvest marketing historically has been beneficial to farmers by locking in higher prices than are offered at harvest. But going into 2013, corn prices could go to above $8 if drought continues or decline to under $4 if a near normal crop is produced on a large planted acreage. Therefore farmers are hesitant to prepare their 2013 marketing plan and sell any crop at near breakeven prices and well below 2012 crop prices.

As the first part of every marketing plan, a farmer should determine their 2013 estimated breakeven prices. This would be the starting or minimum price for pre-harvest marketing their 2013 crop. A more conservative approach due to the drought conditions might be to lower expected yield below the APH. I might also lower the percent of my crop I am willing to price in my pre-harvest marketing plan to compensate for the current moisture levels.

Art Barnaby, one of the originators of the crop insurance policy from Kansas State, said, "If you buy crop insurance and don't do pre-harvest marketing you are wasting your insurance money."

But with crop insurance--even if you sell 75 percent of your crop pre-harvest--you have some assurance that if your yields are lower than 75 percent of APH, your insurance will reimburse you for the lower yield at the spring or harvest price, whichever is higher. Make sure you do not use the Harvest Price Exclusion product. This way, if prices are much higher at harvest than spring, you will receive a higher guarantee price and be able to repurchase any of your pre-harvested grain that you did not produce with the insurance revenue.

Once the spring price is set for revenue crop insurance, a farmer should not sell below this price or risk losing some of the insurance coverage. Farmers could discount the APH yield as well if drought conditions exist and use this lower yield to. If you choose this option you should recalculate your higher estimated breakeven prices with the lower yields and adjust your marketing plan accordingly.

Each year is different, but if you have a proactive marketing plan in place, you will be better able to adapt to what happens in each crop marketing year. You'll also be prepared for a short crop if the drought conditions persist.

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