Farmland rent negotiations could be complicated this year

Published 8:56 am Friday, November 2, 2012

GRAND FORKS, N.D. — One of the toughest jobs in farming could be even trickier than usual this winter.

Many farmland rental agreements expire at year’s end, and area farmers and landlords are working to reach new deals. The task is complicated by two conflicting trends:

— Crop prices are high, and many farmers will enjoy strong profits this year. Given that, many landlords want higher rents for their property.

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— Drought grips the region and 2013 crop yields threaten to be poor unless substantial precipitation falls by spring. Also, experts generally agree that crop prices likely will be lower next year. Given that, many farmers are reluctant to pay higher rents.

Reconciling the two trends and arriving at a mutually agreeable price won’t be easy, area agriculture officials said.

“It’s making a lot of people scratch their heads right now,” said Paul Craigmile, market president of agriculture and business banking for American Federal Bank in Hallock.

Nonetheless, some area farmers are paying more — a lot more — to rent land.

The average farmland rental rate has risen 40 percent in roughly 30 two-year North Dakota farmland agreements renegotiated this fall by US Bank’s Farm Management Group, said Charles Peterson, a Fargo-based vice president for the organization. As an example, farmland that rented for $50 per acre in 2011 and 2012 will rent for $70 per acre in 2013 and 2014.

The rates in some of the new leases are 20 to 30 percent higher than two years ago, while rates in other new leases have risen by as much as 70 percent, with the overall increase averaging 40 percent.

“The demand is out there,” said Peterson, who is active in the North Dakota Chapter of the American Society of Farm Managers and Rural Appraisers.

Farmland in the 30 leases stretches from southeast to southwest North Dakota, he said. US Bank’s Farm Management Group manages about 1 million acres of farmland, including roughly 200,000 acres in North Dakota and Minnesota.

Typically, rental rates in farmland agreements handled by farm management companies tend to be higher than rates in agreements negotiated directly by farmers and landlords, said Andrew Swenson, North Dakota State University Extension Service farm management specialist. He said he’s heard anecdotal reports that rental rates are rising across the state but has no reliable statistics.

Burton Pflueger, a South Dakota State University Extension specialist who tracks land prices and rental rates, said he doesn’t have any hard data on 2013 rental rates. But like other extension specialists, he recommends that farmers and landlords look carefully at flexible rates, which allow farmers and landlords to share the gain in good years and the pain in bad years.

The farmland rental rates paid by some farmers don’t make economic sense, said Brad Thykeson, a Portland farmer and president of the North Dakota Grain Growers Association.

Historically, some famers have overpaid for land. Those who do invariably “get their ears trimmed down the road,” he said.

Landlords, in trying to reach a fair rental agreement, need to keep in mind that crop prices could fall sharply and that drought threatens next year’s crop, Thykeson said.

The failure by Congress to pass a new farm bill also needs to be considered in rental rate negotiations, since most farmers rely on federal crop insurance, said Kurt Krueger, a Rothsay, Minn., farmer and immediate past president of the Minnesota Soybean Growers Association.

Landlords also need to realize that the cost of expenses such as fuel and fertilizer continue to rise, farmers say. Craigmile said a number of his farming clients have found that costs involved with the 2012 crop were greater than they expected.

The region’s drought almost certainly will affect rental rates negotiated this fall, but it’s difficult to estimate how much. Peterson, with US Bank’s Farm Management Group in Fargo, said moisture conditions could improve substantially before the 2013 crop is planted. He also notes that advances such as no-till farming and drought-resistant crop varieties reduce the damage from dry conditions.

The NDSU Extension Service plans to conduct workshops on farmland leasing arrangements later this year and early next year at locations around the state.

Pflueger, the SDSU Extension specialist, said farmers and landlords should take their time and do things right.

“Don’t rush. Make sure you get an agreement that’s fair to both sides,” he said.