Rental Negotiations and Agreements; Some Tools & Common Sense to Consider

1. Rental Negotiations and Agreements; Some Tools & Common Sense to Consider By: Willie Huot Extension Agent/Grand Forks County Farm Business Management & Economics

2. Historical Land Values(50 years ago) • Ramsey Co. ?? • Pembina Co?? • State Average??

3. Prices (Per Acre) in 1959 • Ramsey Co. $53.00 • Pembina Co $112.00 • State Average $52.00 • Source – ND Ag Statistics

4. 3A: Benson, Bottineau, Cavalier, McHenry, Nelson, Pierce, Ramsey, Renville, Rolette, Towner, Ward 3B: Barnes, Eddy, Foster, Griggs, LaMoure, Steele, Stutsman, Wells

5. 2009 Cropland Values

10. “Farm Belt Booming” • Increases since 2009 • 10% Upper midwest • 13% Iowa • 11% Indiana • 11.8% Nebraska ((Irrigated) • 12.2% Kansas • (Source - Federal Reserve Bank)

11. North Dakota IncreasesJan 2009 - Jan 2010 • NW Region – 11 % to $527 • SE Region - 9% to $1481 • SO RRV - 7% to $2136 • SW 6.5 – 4% to $598 • NE “ “ $887 • S Cent “ “ $712 • N RRV “ “ $1546

17. Land cost TrendsSelected States

18. 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

20. Net farm Income trends

21. So How much rent is “too much?” • Difficult question to answer • Will vary a great deal between producers • 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

22. 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

23. 2010 was a year of: • Good yields • Good prices • Low interest • Favorable capitol gains

24. 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

25. 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

26. 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

27. 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.

28. 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

29. FAIR RENT SOFTWARE • A great tool to analyzing your land costs!!

30. Input Features Include • Revenue projections for each crop in the plan • Expense projections • Government program information

31. Output Provides • Full analysis of the land rental picture • Cash & share rental analysis • Comparing different rental arrangements • Rent sensitivity based on both price & yields • Direct & Countercyclical payment estimates

32. 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.

33. Let’s look @ an example • “Lakeside Acres • 1600 acres • Four Crops • Wheat • Barley • Soybeans • Canola

34. 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

35. 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

36. 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

37. Landlord Newsletter Information • “What’s going on” • Crop Conditions • Weather update • Commodity prices • Technology update • Upcoming events • Summary • Contact information

38. Guidelines for operators • 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

39. Guidelines for Landlords • Written leases • Ask questions • Stay informed !! • Visit the farm/ranch often • Schedule yearly meeting • Be rational & realistic

40. Landlord-Operator Checklist • Understand the goals • Managing risks • Lease preferences • Communication plan that fits both parties • Attitude toward changes • Understand the constraints • WIN/WIN strategy

41. 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.

42. 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.

43. 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.

44. 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.

45. Questions ? • Thank you • Contact information willie.huot@ndsu.edu (701) 780-8229

46. Presentation posted on Grand Forks County Web site