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Extension > Agricultural Business Management News > April 2015

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.
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