Agri News, MN
02-27-07
Higher corn prices spark strong land values, rental rates
By Jean Caspers-Simmet
Agri News staff writer
TRIPOLI, Iowa -- Rapidly rising corn and bean prices are impacting land values and rental rates, says Craig Chase, Iowa State University Extension farm management specialist.
At last week's risk management meeting in the Bremer County Extension office,
Chase said his phone has been ringing frequently with questions about where to set rental rates for this year and beyond.
Cash rental contracts must be terminated by Sept. 1. Because of that many rents won't respond to higher grain prices until next year. Some landowners routinely cancel contracts so rental rates for the following year can be negotiated after the current harvest. Terms can also be adjusted by mutual agreement.
Many people want to match what other land in their area is renting for. William
Edwards, an ISU economist, conducts a survey of cash rental rates every spring.
Results are available in May.
Landlords and tenants need to set rental rates in line with expected income from the crops, Chase said. In the past decade, average cash rents in Iowa compared to gross revenue per acre have been in the 35 percent to 40 percent range for corn and the 45 percent to 50 percent range for soybeans.
Gross revenue was estimated as the state average yield multiplied by the average cash marketing price for that year's crops. LDP payments were included.
Another approach is to estimate the net return to the landowner based on a 50-
50 crop share lease, Chase said. The calculation would be 50 percent of the expected yield multiplied by the expected market price, minus one-half the seed, fertilizer and pesticide cost.
Edwards has cautioned that much of the 2006 crop was priced prior to harvest when prices were considerably lower than they have been since September,
Chase said. Bushels to be produced in 2007 can be forward priced at very profitable levels today. However, most farmers won't sell 100 percent of their expected production in advance. These prices could decline by harvest.

Cost for seed, fertilizer and pesticides continues to increase, Chase said. Some estimates are that farmers will spend about $20 more per acre on corn inputs this year.
"If grain prices stay at historically high levels, higher cash rental rates are inevitable," Chase said. "However, past history tells us that other sectors of the economy will eventually adjust and push prices closer to more traditional levels."
Volatile prices have created more interest in flexible cash lease agreements,
Chase said. Under a flexible lease, the tenant and owner agree that the cash rent will be determined after harvest, based on actual yields and prices. A common formula is to set the rent equal to a percent of the gross value of the crop.
Another way is to set a base rent and add a bonus payment if gross revenue is above a certain level.
Some owners and tenants are considering traditional 50-50 crop-share leases,
Chase said. These give landowners a chance to benefit from higher prices, but reduce the tenant's financial risk in case of lower prices or poor yields. Farmers can find information on rental rates and flexible rental agreements at the Ag
Decision Maker web site at www.extension.iastate.edu/agdm/ or from county
Extension offices.