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Cash rent, land prices take center stage

By Staff | Aug 7, 2016

GARY WRIGHT, standing in background, helps attendees at a July 27 farmland leasing meeting in Spencer work through prepared material.

SPENCER – Crop land prices in Iowa, Minnesota and Illinois declined in the Midwest last year compared to 2014, with Iowa taking the biggest hit – a 6.3 percent reduction – according to U.S. Department of Agriculture.

The USDA’s figures were used July 27 at an Iowa State University Extension meeting focusing on land values and cash rent.

USDA estimated average Iowa crop land values at $8,200 per acre.

“Commodity prices are in a tailspin,” said Gary Wright, a farm management specialist with ISU Extension, alluding to land values and cash rent. “The markets are volatile – we wish we knew what this crop size was and what the weather is going to do.”

The 2016 cash rental rates for Iowa survey conducted by ISU showed that farmland cash rental rates declined for the third consecutive year, decreasing by $16 per acre from 2015 to 2016.

“Leases should always be in written form, not because you don’t trust the other person, but because you value that relationship.” —Gary Wright ISU?Extension farm management specialist

All nine districts in Iowa showed a decline in reported rental values, from $24 per acre in southwest Iowa to $4 in south central Iowa. Northwest Iowa reported the highest per-acre average value in 2016 at $250 per acre and south central Iowa the lowest at $183.

Wright said with today’s sagging market prices, complexities are changing and flex leases are being talked about more often in conversations between landlords and tenants.

“There is no other pure capitalist business in the world like farming,” he said.

His information showed that farmers have been purchasing most of the crop land in 60 to 80 percent of the states since 2006, with the other 20 to 40 percent of the rest being purchased by investors.

Crop land prices in northwest Iowa have dropped 15 percent from the high in 2012 to 2015 prices of $11,000 for high-quality soil, and less than that for medium to lower-quality soils.

Rented farmland

Wright said more than 50 percent of farmland in Iowa is rented out. He said last year cash rent was the most common way of renting land, while flex leasing and crop sharing came in at a virtual dead heat.

“The flex leases and crop sharing did a little better most often,” he said.

With flex leases, rent is paid in cash and rent returns change with price and/or yield. With crop sharing, the rent returns change with price and/or yield and the owner contributes to the costs of crop production.

Wright said some of the crop share lease advantages include the fact that the owner receives more information about yields and inputs, a second USDA payment limit is created, marketing risk is shared, owner is more involved in making decisions and both parties share the benefits from adoption of yield-increasing technology and unexpected high yields or prices.

Drawbacks to that method include the fact that the owner and tenant agree on how production expenses will be shared, on adjustments for cost-sharing of storage and drying facilities and herbicide/fertilizer/pesticide applications, on the cropping plan and government program participation.

Wright said landowners may want to be cautious about the government program participation with this form of land leasing.

“The owner will likely be categorized as an active farmer, which makes their farm income subject to self-employment taxes on their Schedule F form,” he said.

Figures for the average 2016 typical cash rents for corn and soybean acres (for all qualities of farm land) came in at $248 per acre in northwest Iowa, $243 per acre in north central Iowa, $245 per acre in west central Iowa and $239 per acre in central Iowa.

Figures were lower than those in southern Iowa all across the state.

Wright said the Iowa legislature clarified the termination law, stating that beginning in 2016, land lease terminations must be received in written form by Sept. 1 each year. He said if a tenant or landowner has not received a separate termination notice (not within the lease agreement) in writing by that time each year, the lease automatically is renewed for the following year.

Be specific

He added that landowners and tenants should be specific about what to include in leases – such as fencing, hunting rights, conservation practices (crop residues, tillage, etc.) and wind turbines and pipelines.

“Leases should always be in written form, not because you don’t trust the other person, but because you value that relationship and you don’t want anything to come between you,” said Wright.

He added leases that last five years or more must be in writing and recorded at the county recorder’s office, and that leases of more than one year must be in writing to be enforceable.

He had a laundry list of “should-dos” between land owners and tenants (especially when they are family) to keep the relationship healthy. The biggest one was to talk often, not just at rent-paying time.

Know the costs

Wright said it’s imperative that land owners and tenants know their cost of production when figuring up rental rates, including pre-harvest costs, crop inputs, harvest-time costs, labor and land, and compare it to the commodity prices of the day.

Cover crops might also come into the conversation, he said, because if they decrease profitability, a discussion should occur as to whether or not rent will be decreased to “incentivize” a long-term conservation strategy to improve soil health and productivity.

Wright said influences on the 2017 lease market include prices (acres and weather, crude oil price and ethanol demand and price; export demand and the exchange rates, livestock feeding); reduced profits in 2016, farm bill payments, financing and the status of supply and demand.

He told producers they can find out information about their soil by looking up “Web Soil Survey” online.

They can also find out their CSR and CSR-2 numbers, along with a host of other information, by going to the Natural Resources and Conservation Service website and identifying their farms.

Wright encouraged land owners and tenants to take an active role in the Iowa Nutrient Reduction Strategy on their land in an effort to reduce the chances of the federal Environmental Protection Agency getting involved in the process.

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