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Extension > Agricultural Business Management News > October 2017

Friday, October 13, 2017

What is a Fair Farm Rental Agreement?

By David Bau, Extension Educator

Landlords, Farmers, Agri-Business Professionals should make plans to attend one of the informative meetings being held across Central and Southern Minnesota.  These free meetings are being provided by the University of Minnesota Extension.  Farmer profits are low or negative and farm land rental rates declined slightly while commodity prices have decreased significantly. Determining a fair profitable farm rental agreement is a challenge in today’s economy with recent record corn and soybean prices and record farm land values as recently as 2012 but commodity prices continued to decline since then.

Negotiating a fair rental agreement that satisfies the land owner and the farmer is a challenge.  David Bau and Nathan Hulinsky, Extension Educators in Ag Business Management, will provide several ways; by examples, factsheets and worksheets to determine a fair farm land rental rate for both parties.

Topics covered at the meetings will include local historic and projected farmland rental rate trends, current farm land values and sales, a worksheet that will help determine a fair rental agreement.  Input costs for 2018 will be presented along with current 2018 corn and soybean prices.  Worksheets will examine 2018 costs and what is affordable rent that a farmer will be able to pay in 2018, the rate of return to the landlord at current market values and examine flexible rental agreements.

Make plans to attend one of these forty-two meetings now.  Attendees will receive several informative worksheets and factsheets that will help to determine what is a fair 2018 farm land rental rate is.

The meetings will be held in Ada, Albert Lea, Alexandria, Albert Lea, Benson, Blue Earth,   Buffalo, Caledonia, Chaska, Clearbook, Cold Springs, Cologne, Crookston, Elko New Market, Faribault, Farmington, Foley, Gaylord, Hutchinson, Jordan, Le Center, Litchfield, Little Falls, Long Prairie, Madison, Mankato, Grygla, Olivia, Owatonna, Pipestone, Preston, Red Lake Falls, Rochester, St. Charles, St. Peter, Slayton, Sleepy Eye, Waseca, Willmar, and Worthington starting in Slayton on November 3, 2017 and ending in Pipestone on December 19, 2017.  Check out the Agricultural Business Management calendar on web at: www.extension.umn.edu/agriculture/business/ for specific times and locations.

Wednesday, October 11, 2017

What Direction will 2018 Farmland Rent Go? Stay the Same? Up? or Down?

By David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2018 farmland rental rates and the last actual numbers available are for 2016 so I am forced to estimate figures for 2017 and 2018.  When I did this last year I used an estimate of a 10% decline and the actual figure came in at 2.5% decline statewide.  For 2017 I heard many times that rents were down, although some rents went up and some remained the same, in table 1 below I estimated a 2.5% decline in 2017 from 2016.

But what direction should 2018 farmland rental rates go?  How do I determine an estimate for 2018 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase. While the state legislature help with some of the school referendum costs they still increase taxes.  If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate.  Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in
2012 for corn and 2013 for soybeans and current prices offered for 2018 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre.  Average production budgets for 2018 indicate losses for farmers if rents are above $122 per acre.

With the average rents in Table 1 in 2016 averaging $212 per acre, to go down to $122 per acre would be over 42% reduction in average rents.  The average Southwestern Minnesota corn farmer has lost money for three consecutive years and soybeans lost money in 2014 and 2015 and made money in 2016.  The results for 2017 corn and soybeans look to be negative again.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2018 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $511 for corn and $281 for soybeans before rent and labor, this would leave $74 per acre for corn and $169 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $122 per acre to be shared.

So I projected a 2.5% decline in rental rates from 2017 to 2018 for figures listed in Table 1.

But from earlier examples 2018 farmland rates could go down by over 42% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2018 farmland rental rate should be.


2016 ARC-CO Payments for Minnesota

By Curtis Mahnken and Bob Craven, Center for Farm Financial Management, Applied Economics

The Farm Service Agency (FSA) recently released 2016 county yields for corn, soybeans and wheat. These yields along with the marketing-year-average (MYA) prices which were released in September provide the information needed to calculate Agricultural Risk Coverage-County (ARC-CO) payments. These payments will be made in October 2017.

ARC-CO triggers a payment based on a crop’s base acres if the actual county revenue for that crop is less than 86% of the “benchmark” revenue. For corn, the MYA price (Table 1) is almost 30% lower than the benchmark price. Payments will be made in counties where the 2016 yield is up to 22% above the county benchmark yield. For wheat, payments will be triggered in counties where their yields are up to 48% above the benchmark yield.

Table 2 includes the payments per base acre by county for corn and wheat. These numbers have been adjusted to reflect the 6.8% reduction for budget sequestration. For soybeans, there are only two counties in Minnesota that will receive ARC-CO payments, Kittson ($12) and Lake of the Woods ($19).

The variability in payments between counties are a result of differences in the 2016 crop yield compared to the county benchmark that is based on 2011-2015 yields. There is significant variation not only in the 2016 yields but also in the benchmark yields between the counties. Counties with a high yield compared to their benchmark will not receive payments.

To calculate the payment for a farm, multiply the base acres by the payment for that county. A farm in Waseca County would receive $29 per base acre for corn. With a 300 acre corn base the payment would be 300 x $29 = $8,700.





Monday, October 2, 2017

New Opportunities for Minnesota Beginning Farmers and Farm Asset Owners Who Want to Help Them

By Don Nitchie, Extension Educator

Beginning in 2018, there are two new opportunities available which can be very helpful to beginning farmers in Minnesota. These programs are the Beginning Farmer Incentive Credit for existing farm asset owners who rent or sell assets to beginning farmers and the Beginning Farmer Management Credit for the beginning farmer enrolled in an approved farm business management program. These tax credits can reduce an individual’s Minnesota income tax. The programs were created by the Minnesota Legislature during the 2017 Special Session. According to MDA, current legislation funds these programs through 2023.

According to the Minnesota Department of Revenue posting of June 6, 2017, the beginning farmer incentive credit is a tax credit for owners of agricultural assets. Such assets may be land, livestock, facilities, or machinery located in Minnesota. The assets must be sold or rented to a beginning farmer who is not a family member of the asset owner, as defined in the Internal Revenue Code. Seven eligibility requirements are listed for beginning farmers and are listed below. The credit equals 5% of the sale price of the asset (up to $32,000), 10% of the gross cash rental income in each of the first three years of a rental agreement (up to $7,000 per year), or 15% of the cash equivalent of the gross rental income of the first three years of a share-rent agreement (up to $15,000 per year). If the amount of the credit exceeds tax liability, the excess may be carried forward 15 years. Equipment dealers do not qualify for the credit. The total value of credits allocated by the Rural Finance Authority is capped at $5 million for tax year 2018 and $6 million per year in later years. Certificates for the credit will be issued on a first-come first-served basis, but with preference for some re-certifications. The beginning Farmer will need to participate in a farm business management education program.

The beginning farmer management credit is equal to 100% of the cost of participating in a financial management program approved by the Minnesota Rural Finance Authority (up to $1,500 per year). The credit can be taken for three years directly reducing Minnesota Income tax due for the beginning farmer. If the amount of the credit exceeds tax liability, the excess may be carried forward three years.

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