Transcript Land Rental Negotiations

Rental Negotiations and Agreements;
Some Tools & Common Sense to
Consider
By: Willie Huot
Extension Agent/Grand Forks County
Farm Business Management &
Economics
Historical Land Values
(50 years ago)
• Ramsey Co. ??
• Pembina Co??
• State Average??
Prices (Per Acre) in 1959
• Ramsey Co.
• Pembina Co
• State Average
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Source – ND Ag Statistics
$53.00
$112.00
$52.00
3A: Benson, Bottineau, Cavalier, McHenry, Nelson, Pierce,
Ramsey, Renville, Rolette, Towner, Ward
3B: Barnes, Eddy, Foster, Griggs, LaMoure, Steele, Stutsman,
Wells
2009 Cropland Values
“Farm Belt Booming”
• Increases since 2009
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10% Upper midwest
13% Iowa
11% Indiana
11.8% Nebraska ((Irrigated)
12.2% Kansas
– (Source - Federal Reserve Bank)
North Dakota Increases
Jan 2009 - Jan 2010
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NW Region – 11 % to
SE Region - 9% to
SO RRV 7% to
SW
6.5 – 4% to
NE
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S Cent
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N RRV
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$527
$1481
$2136
$598
$887
$712
$1546
Land cost Trends
Selected States
State
Ave Value Ave value
2007
2008
Iowa
Illinois
Indiana
Wisconsin
Alabama
Minnesota
Nebraska
$3,600
$4,150
$3,640
$3,370
$2,450
$2,420
$1,760,
$4,260
$4,850
$4,40
$3,600
$2,650
$2,700
$2,050
Ave
Value
2009
$4,050
$4,670
$3,950
$3,650
$2,500
$2,370
$2,180
Louisiana
$1,690
$1,830
$1,740
Ohio
Missouri
North
Dakota
$3,820
$2,330
$670
$4,140
$2,500
$810
$3,900
$2,360
$800
%
Ave Cash
change
rent
08 - 09
2009
-4.9
$180
-3.7
$170
-4.6
$141
+1.4
$89
-5.7
$42
-3.2
$116
+6.3 $164 Irrig
$100 Dry
-4.9
$89 Irrig
$67 Dry
-5.8
$100
-5.6
$90
-1.2
$45.50
Project Ave Cash Rent 2011
• $43.30 Northeast Region
– Towner, Cavalier, Ramsey, Nelson
• $40.80 North Central
– Incl. Rolette, Pierce, Benson
• $65.20 North Valley
– Pembina Walsh, Grand Forks
• $46.10 East Central
– Eddy, Foster, Stutsman
Net farm Income trends
So How much rent is “too much?”
• Difficult question to answer
• Will vary a great deal between producers
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Balance sheets
Debt to asset ratios
Production efficiency
Costs of Production
Longer term projected commodity prices
Long term goals for your operation
Risk bearing tolerance
Quality of land being rented
Recent study revealed
• Lease preferences are influenced less by
risk aversion than by characteristics of the
leasing relationships
– Threat of opportunism from the landlord
– Potential returns to producers management
ability
2010 was a year of:
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Good yields
Good prices
Low interest
Favorable capitol gains
2010 a year of
• Continued excessive moisture in Lake
Region
• Unplanted acres
– Excessive moisture
– Inaccessible acres
• Late/unharvested acres
• Excessive snow fall in late Dec
Some Tools & Strategies to Consider
• Web soil survey
– Determines relative productivity of land being
considered
– Calculates soil productivity index
• FAIR RENT SOFTWARE
– Determines what a fair rental price based upon you
individual situation.
• Good Communication Strategies
– Critical for good relations between parties
Web Soil Survey
• Based upon original soil surveys conducted
in 1980’s
– Updated information
– All web based
– Determines a relative productivity index for
soils being considered
– Developed by NRCS
– Counties beginning to use Productivity Indexes
to determine taxable valuations
Basic steps to Follow
• Go to website:
http://websoilsurvey.nrcs.usda.gov/app/
• Define the “Area of Interest.”
• Create the soil map for your area of interest.
• Determine the productivity index for each
soil type.
• Determine the “prorated” productivity index
for your Area of Interest.
Three Examples
• Sec 21 T 153 N R 60 W (NW of Lakota)
– Productivity Index of 66.23
• Sec 20 T 154 N R 65 W (Near Grand
Harbor)
– Productivity Index of 76.12
• Sec 8 T 157 N R 61 W (NW of Edmore)
– Productivity Index of 69.41
FAIR RENT SOFTWARE
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A great tool to analyzing
your land costs!!
Input Features Include
• Revenue projections for each crop in the
plan
• Expense projections
• Government program information
Output Provides
• Full analysis of the land rental picture
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Cash & share rental analysis
Comparing different rental arrangements
Rent sensitivity based on both price & yields
Direct & Countercyclical payment estimates
Will Answer These Questions-• What can I realistically pay for cash rent?
• What happens if my yields and/or prices
drop below projections?
• What are my break even yields & prices
• What yields/prices it will take to break
even @ “asking price”
• Determine the difference between different
share rental arrangements.
Let’s look @ an example
• “Lakeside Acres
• 1600 acres
• Four Crops
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Wheat
Barley
Soybeans
Canola
Public Relations Strategy
• Frequent communication with landlord(s)
• Educating landlord(s) about current ag
conditions
• Explain farm input & out put changes
• Provide regular crop reports during growing
season
• Good maintenance of property appearance
• Treating landlord(s) we would like to be
treated
Communication is Important
• Some Landowners becoming “further
removed for agriculture”
– View their land primarily as “an asset to
generate wealth” (as much as possible)
• Helps to “Educate & inform them” of
important issues impacting their land & the
potential profitability on a frequent
Some examples/ideas
• Input & output estimate @ the time of lease
negotiation. (Crop budgets)
• Scheduled e-mails/newsletters throughout
year to update owners of ever changing
conditions during year
– Crop stages & conditions
– Pest problems
– Unexpected weather events/conditions
Landlord Newsletter Information
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“What’s going on”
Crop Conditions
Weather update
Commodity prices
Technology update
Upcoming events
Summary
Contact information
Guidelines for operators
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Written lease agreement
Clearly defined cropping plan
Inform & educate landlords
Cost & Income information
Regular Updates
Alert landlord(s) of problems
Encourage landlord(s) to visit your farm
PAY EXPLICIT ATTENTION TO THE
NEXT GENERATION OF OWNERS
Guidelines for Landlords
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Written leases
Ask questions
Stay informed !!
Visit the farm/ranch often
Schedule yearly meeting
Be rational & realistic
Landlord-Operator Checklist
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Understand the goals
Managing risks
Lease preferences
Communication plan that fits both parties
Attitude toward changes
Understand the constraints
WIN/WIN strategy
Trends For 2010
• Vary by regions
• Rents likely to remain level or rise modestly
in most regions
• Rental rates increases continue to lag.
increases in land value increases.
• Increased interest in flexible rental agreements
or share rents.
• Land rent auctions tend to go higher than
negotiated agreements.
Trends (Continued)
• Rent negotiations often getting more difficult
to do between parties.
• More owners demanding more cash upfront.
• Land value increases have reduced the rate of
return on land investments; especially in the
more competitive regions of the country.
• Few record high sales continue to “raise the
bar” on expectations of what landowner
believe their land is worth.
Trends (Continued)
• Many absentee landowners attempting to
“cash out” on high land prices;
• Most sales going to larger, better positioned
farm operators
• Increasingly difficult for younger, under
capitalized farmers to compete.
• Greater percentages of sales are being made
with substantial amounts of cash up front.
Summary
• Land price negotiations becoming more
complex
• Needs to be a win/win situation
• It’s all about good communication
• Good relationships are the vital key
• Seek the best means of communication for
you & your business.
Questions ?
• Thank you
• Contact information
[email protected]
(701) 780-8229
Presentation posted on Grand
Forks County Web site