Land Lease Education Program
Ron Haugen
North Dakota State University
Extension Service
2014 Women in Agriculture Educators National Conference
Indianapolis, Indiana
April, 2014
Acknowledgments:
Dwight Aakre, North Dakota State University Extension Service,
Farm Management Specialist
Willie Huot, Grand Forks County Extension Agent, North Dakota
State University
2
North Dakota Crop Budget Regions
3
North Dakota Land Rents by Region 2008 and 2013
NE
NC
NW
$28.00
$36.80
$36.50
$50.20
NV
$38.00
$55.50
$55.50
$92.70
EC
SC
SW
$27.50
$37.70
$39.50
$66.80
SV
$71.00
$117.00
$30.00
$57.10
SE
$52.50
$94.00
Source: North Dakota Ag Statistics Office of USDA
4
Background: Land Ownership
• Agricultural land ownership has remained stable over the past
five years. The 2007 Census of Agriculture shows that 62
percent of farmland in the U.S. is owned by the operator.
Areas with more cropland, such as the Midwest, tend to have
a greater percentage of rented land.
• In North Dakota approximately 66 percent of land is rented
and 33 percent is owned by the operator
5
6
Core Topics
•
What is an equitable share agreement?
•
Flexible cash rent agreements
•
What can you afford to pay for cash rent?
•
Landowner/tenant communications
- Other current event topics were presented at sites
including marketing and production information
7
Fixed and Flexible Cash
Rental Arrangements
Fixed Cash Rent Methods
1.
2.
3.
4.
5.
6.
7.
8.
Cash rent market approach
Landowner’s cost or desired return
Landowner’s adjusted net-share rent
Operator’s net return to land
Percent of land value
Percent of gross revenue
Dollars per bushel of production
Fixed bushel rent
9
Putting Flexibility in Cash
Rent Agreements
• Crop-share leases were the original flexible rents
– The scale of today’s operations makes share rents
somewhat impractical
• Cash rents may be adjusted by market prices, crop yields and
production costs
10
Advantages of Flexible Cash Rents
1. Landowner shares in additional income from:
• Price increase
• Yield increase
2. Reduced risk for operator when:
• Prices drop
• Yields are reduced
11
Disadvantages of Flexible Cash Rents
1. Increased risk for landowner
2. Landowner may be concerned about accuracy of reported
yields
3. Higher rent due to increased yields means the operator may
be giving up some of the benefit from managerial input
4. Calculating the rent requires more management and
communication
12
Methods of Flexing Cash Rent
Flexing for Crop Price Only
• Increases risk substantially for operators
Example 1
Base rent multiplied by ratio of current year’s price to base
price
Base rent x (current year’s price ÷ base price) = current year’s rent
$40 x ($7.50 ÷ $7.00) = $42.86
13
Flexing for Crop Price Only
Example 2
Rent equal to the value of a fixed amount of commodity
“The amount of cash rent is equal to the value of 5 bushels of
HRS wheat based on the average daily closing price for the
month of September.”
5 bushels x $7.50 = $37.50
14
Flexing for Crop Price Only
Example 3
Base rent with stated adjustments for prices outside a specified
range
Owner and operator agree on a rent of $40 per acre if the
current price of wheat is between $6.00 and $7.00 per bushel.
For each $0.25 change in price above or below this range, the
rent will increase or decrease by $1.50 per acre.
15
Flexing for Crop Price Only
Example 4
Minimum base rent with upward adjustments.
Owner and operator agree to a base rent of $35.00 per acre if
the wheat price is $6.50 per bushel or less. For each $0.25 per
bushel increase, the rent will increase $1.50 per acre.
16
Flexing for Yield Only
Example 1
Base rent is multiplied by a ratio of the current yield divided by
a base yield to calculate current rent
$40 x (38 bu. ÷ 35 bu.) = $43.43
17
Flexing for Yield Only
Example 2
Actual yield is multiplied by a fixed value per bushel decided in
advance
Rent equals actual yield times $1.20 per bushel for wheat
38 bu. yield x $1.20 = $45.60 per acre
18
Flexing Rent for Price and Yield
Current Price Current Yield
Base Rent x ----------------- x ----------------- = Rent Paid
Base Price
Base Yield
19
Flexing for Price and Yield
Example 1
Operator and landowner agree to a base cash rent tied to a
base yield and a base price
Base rent x (current yield ÷ base yield) x (current price ÷ base price)
$50 x (38 bu. ÷ 35 bu.) x ($9.00 ÷ $8.00) = $61.07
20
Flexing for Price and Yield
Example 2
Rent equals an agreed upon percentage of crop value
35 bu. x $8.00 x 20% = $56.00
•
•
•
•
Total rent payment is flexible
Nearly identical to a crop-share lease
Appropriate percentage different for each crop
Percent share may change over time
21
Flexing for Price and Yield
Example 3
Minimum base rent plus a bonus
Rent equals $40 plus 25% of total revenue per acre above
$245.00 per acre
Actual revenue = 36 bu. x $8.00 = $288.00
Rent = $40 plus 25% x (288-245) = $50.75
22
Base Rent Plus Bonus (Flex Rent)
Provides for a base rent plus a bonus if total revenue exceeds
some level
Example
Base Rent = 10% below average cash rent
Revenue Threshold = farm’s average yield times
spring insurance price
Landowner Share Above Threshold = one third
23
Flexing Rent on Price, Yield and Input Costs
• Price and yield are both important. However, it is the margin
over direct costs that pays rent.
• Price volatility for input costs is increasing.
• Including the cost of seed, fertilizer, pesticides and diesel,
and drying fuel will further protect the margin for the
operator.
24
Flexing Rent on Price, Yield and Input Costs
Example
Base rent is multiplied by a factor for price, yield and input costs
$50 x (current price ÷ base price) x (current yield ÷ base yield) x
(base input costs ÷ current input costs) = current rent
25
For Success or Flexible Rents
• Base rent, yields, prices, and input costs MUST be determined
up front
• All details must be clearly stated in the contracts
• Yield, price, and input cost information needs to be identified
for each crop grown
• Contracts should be reviewed annually
• Good relations between parties is a must!
26
Affordable Cash Rent
27
Projected North Central Budgets, 2012
Spring Wheat
Corn
Canola
Soybeans
Per Acre
Per Acre
Per Acre
Per Acre
37
8.68
$321.16
9.00
$330.16
90
5.57
$501.30
9.00
$510.30
1480
0.245
$362.60
9.00
$371.60
28
12.350
$345.80
9.00
$354.80
19.80
24.50
5.50
0.00
61.09
16.70
17.68
17.05
0.00
1.50
3.76
$167.38
66.74
17.50
0.00
0.00
80.56
31.30
25.82
20.97
18.00
1.50
6.04
$268.43
47.00
19.00
0.00
0.00
78.90
14.70
18.13
17.44
0.00
1.50
4.52
$201.19
64.75
17.50
0.00
0.00
8.14
16.20
14.61
15.23
0.00
7.25
3.30
$146.98
6.86
19.84
11.68
15.00
$53.38
8.91
30.29
16.99
15.00
$71.19
6.91
20.64
12.16
15.00
$54.71
6.36
18.44
10.29
15.00
$50.09
Sum of all Listed Costs
$220.76
$339.62
$255.90
$197.07
OPERATOR & LAND RETURN
$109.40
$170.68
$115.70
$157.73
$5.97
$3.77
$0.17
$7.04
40.00%
10.00%
30.00%
20.00%
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Market Yield
Market Price
Market Income
Direct Payment
Total Income
DIRECT COSTS
Seed
Herbicides
Fungicides
Insecticides
Fertilizer
Crop Insurance
Fuel & Lubrication
Repairs
Drying
Miscellaneous
Operating Interest
Sum of Listed Direct Costs
EXAMPLE
INDIRECT COSTS
Misc Overhead
Machinery Depreciation
Machinery Investment
Hired Labor
Sum of Listed Indirect Costs
LISTED COSTS PER UNIT
Percent of Rotation
WEIGHTED RETURN TO OPERATOR AND LAND
$127.08
Landlord/Tenant Communications
29
Farm Resume
•
Management objectives
•
Experience and advanced training
•
Education
•
Occupation, family, organizations and community service
•
Environmental statement
•
Risk management strategies
•
Communication
•
Insurance coverage and primary financing
•
References
•
Newsletters
•
E-mails
•
Websites
30
Program Administration
• Collaborated local county agents and sponsors
– They helped with meeting locations and refreshments
• Used TurningPoint interactive ‘clickers’ to gather audience
responses
31
Number of Meetings and Attendees
• 33 workshops at 26 locations
• 1029 attendees
32
North Dakota Land Lease Meetings 2012-2014
2012 Workshops
2013 Workshops
2014 Workshops
33
Promotion
120
100
80
60
40
20
0
Extension Agent
Extension Email
Extension Mail
Extension
Newsletter
Newspaper
Radio
Relative/Friend
34
Make-up of Workshop Attendees
• Farm operators/Land owners (landlords)
– 45% farm operators
– 55% landlords
• Lenders
• Farm managers
35
In five years land rents will be _______ compared to today?
46%
Lower
Same
Up 10%
Up 20%
Up more than 20%
27%
19%
8%
m
or
e
th
an
20
%
20
%
Up
Up
10
%
Up
Sa
m
e
er
0%
Lo
w
1.
2.
3.
4.
5.
36
Where will the costs of variable inputs be in 5 years?
48%
Lower
Same
Up 10%
Up 20%
Up more than 20%
33%
19%
m
or
et
ha
n
20
%
20
%
Up
Up
Up
10
%
0%
Sa
m
e
er
0%
Lo
w
1.
2.
3.
4.
5.
37
What is an equitable share rent for wheat with the landowner
contributing only land?
50%
landowner/operator
15/85
20/80
25/75
30/70
33/67
32%
9%
33
/6
7
30
/7
0
25
/7
5
5%
20
/8
0
5%
15
/8
5
1.
2.
3.
4.
5.
38
Do you have any flexible rental contracts now?
96%
1. Yes
2. No
No
Ye
s
4%
39
If you have a flexible rental contract today, what factor(s) are
used to adjust the rent paid?
100%
Price of crops produced
Crop yields
Price of inputs
Gross revenue (yield x
price)
r..
.
(y
ie
ld
re
v
en
ue
Pr
ice
of
in
xp
ld
yie
Cr
op
0%
pu
ts
s
0%
Gr
os
s
of
cr
op
s
pr
od
uc
ed
0%
Pr
ice
1.
2.
3.
4.
40
Evaluation
As a Result of Participating in this Program
350
300
250
200
150
100
50
0
I intend to initiate discussion with
landowners (or operators) about a
land lease
I have new ideas and tools to
develop better land lease
arrangements
Yes
I better understand how
relationships between land owners
and tenants may be improved
No
41
Summary of Workshop Evaluation
4
3.5
3
2.5
2
1.5
1
0.5
0
I understand the importance I understand the common
of a written land lease
types of lease agreements
contract
I am confident in selecting I understand the elements to I know the key questions to I have a desire to create an
and drafting an agricultural be included in an agricultural answer when creating dan
alternative leasing
lease
lease
agricultural lease
arrangement
Before
After
42
Take Away Points
• Need for further land lease education
– Tighter crop margins will make lease arrangements a
more critical risk management decision.
• Landlord/Tenant relations
– An old and ongoing issue
– In most cases, more open and frequent communications
creates a better working relationship between the parties
43
Thank You!
Any Questions?
Contact Information:
Ron Haugen 701-231-8103
ronald.haugen@ndsu.edu
Dwight Aakre 701-231-7378
dwight.aakre@ndsu.edu
Willie Huot 701-780-8229
wilfred.huot@ndsu.edu
44