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Farmland leases explored

By Staff | Aug 17, 2009

CLARION – According to Kelvin Leibold, an Iowa State Extension Service farm management field specialist, current farmland rents aren’t justified by market prices. He made his comments at a Wright County farm leasing arrangement seminar held at the county extension office on Wednesday. Similar presentations have been or will be held at various area county Extension offices.

“Some adjustments have to be made to these higher rents set a year ago,” Leibold said. His illustration was a pie with ‘fertilizers, seed, landowners, and other expenses’ all wanting a slice of a pie that is considerably smaller than last year when corn and soybean prices were at, or near, all-time highs.

Both farmland values and rental agreements rocketed with commodity price increases.

“There are a number of ways farms can be leased,” Leibold said. “Risk for the land owner is low with a cash rental agreement. A land owner who has the land custom farmed assumes 100 percent of the risk.” Crops share agreements of various percentages can also be negotiated between the land owner and the tenant.

According to information released by the Federal Reserve Bank of Chicago, farmland values increased by 2 percent from April 2008 to April 2009. Included in that percentage increase was a 7 percent decrease in farmland value from January 2009 to April 2009.

Because of the volatility of the grain markets, only a small percentage of the 2009 crop (about 20 percent) is currently marketed, Leibold told the listening audience. Elevators are not now projecting crop prices for the November/December 2010 because of that instability.

“A good return on investment would be to receive 3 to 4 percent annually,” said Leibold. Along with that return on investment, farmland owners have realized 10 to 12 percent annual increases in their investment when adjusted for inflation, over the past 50 years.

Negative factors, which are affecting land values, and thus the rents for farm ground, are input costs, declining grain prices and the economy in general.

Leibold used Wright County for calculating a possible cash rent scenario. Tillable acres of 75 acres with 179 bushel per acre corn yield (corn suitability rating – 76) and soybean yield of 50 bushels per acre. High quality third of the land cash rent could be $250 per acre; middle quality at $208; and low quality at $164 per acre.

After a year of pretty good yields, outstanding grain prices, and high profitability for producers, Leibold predicts that 2009 “may be a bloody year” for some of our producers. “This might be the year, producers give back some of the large earnings from 2008,” he said. “There also might be some ‘economic profits hangover’ (too many major purchases or investments) from last year.”

He predicted that because some of the expenses to produce a crop will not be able to be cut, some of the losses will “bleed over into land values.”

What are some things Leibold looks to as potential bright spots?

“With declining revenues, we will hopefully, see inputs begin to come down,” he said. “Tenants and land owners can work together to maximize both parties’ investments and profit potentials. There are government sponsored programs (e.g., Beginning Farmer; Taxpayer programs; ACRE and SURE), which are designed to assist farmers. Make sure you are aware of those. Some of them insure your investments, should markets decline below your ability to meet your expenses.”

For more complete information or to have your questions answered, contact Kelvin Leibold at the ISU Hardin County Extension office, 524 Lawler Street, Iowa Falls, IA 50126 or by telephone at (641) 648-4850 or via e-mail at kleibold@iastate.edu.

Contact Karen Weld at (515) 573-2141 or editor@messengernews.net

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