What is a Fair & Profitable Rental Agreement ? 20 Location across Minnesota David Bau

1. What is a Fair & Profitable Rental Agreement? 20 Location across Minnesota David Bau Extension Educator Agricultural Business Management University of Minnesota Extension bauxx003@umn.edu

2. TODAY’S AGENDA: • FINBIN DATA • Increasing Input costs • Minnesota Agricultural Statistic Information • Farm Land Rental Rate Trends • Land Values • Landlord Worksheet • Tenant Worksheet • A Rental Rate That Works; Excel Spreadsheet • Flexible Leases • Rental Lease Examples • What is a Fair Rental Agreement?

3. FINBIN DATA

8. Increasing Input costs

9. Input Cost Trends Input costs for corn have been increasing at rate of 9% for corn since 2003. Input costs for soybeans have increased at a rate of 7% per year since 2003.

10. www.finbin.umn.edu

11. Land Rental Rates Ranged from $67.00 to $265.15 per acre This is almost $200 range in 2011 What will it be in 2013 in your area? $300 -$400

12. Acceptable Price Worksheet: Southwest Research and Outreach website http://swroc.cfans.umn.edu/SWFM/farm_mgmt.html Excel spreadsheet to calculate your breakevens Ranges: $4.50 to $5.20 for corn $10.00 to $13.00 for soybeans

13. Corn Cash Rental PaymentAfter $663 per acre expenses including $70 labor charge Yield Per Acre

14. Minnesota Agricultural Statistic Rental Information

15. Minnesota Cropland and Pasture Rental Rates Data provided by the Minnesota Agricultural Statistic Service September 2011 and 2010 and May 2009 NASS.USDA.GOV Cropland Rental Rates Pasture Rental Rates

16. Minnesota Cropland and Pasture Rental Rates Data provided by the Minnesota Agricultural Statistic Service September 2011 and 2010 and May 2009 Cropland Rental Rates Pasture Rental Rates Irrigated

17. Farm Land Rental Rate Trends

18. Average Cropland Rental Ratespaid in Adult Farm Management FINBIN database. Calculated 2012 and 2013 based on FINBIN rents increased 10.2 percent from 2010 to 2011 multiplied by 2011 rates to estimate 2012 and 15 percent from 2011 to determine 2013 rental rates

21. Ag Lease 101 • HomeDocument LibraryFAQFor EducatorsAbout Ag Lease 101Contact • Ag Lease 101 helps both land owners and land operators learn about alternative lease arrangements and includes sample written lease agreements for several alternatives. Ag Lease 101 was created by and is maintained by the North Central Farm Management Extension Committee. . http://www.aglease101.org/

22. Land Values

23. Corn and Soybeans County Yields Yields from Minnesota Agricultural Statistic Service Annual Bulletins: 2011, 2010, 2009.

24. SW MINNESOTA COUNTY FARM LAND PRICES 2001-2011 Prepared by David Bau, Jim Nesseth 2002-2003 and Erlin Weness 2001 The amounts listed below are the prices paid per acre for total farmland (not tillable acres) in each listed county. The data is from farm sales recorded from January 1st through June 30th of the respective years. The data includes only bare land sales. No land and building combination sales are included. The information is from actual arms length sales reported to county authorities and collected by personnel of the University of Minnesota Extension. Sales data was not weighted for acres, each sale on a per acre basis was averaged to get the average price paid per acre. In 2005 added counties Chippewa, Lac qui Parle, Redwood and Yellow Medicine to study.

25. Minnesota Farmland Sales 2011 and 2010 Average Farmland Sales from Minnesota Land Economics Steve Taff, University of Minnesota http://www.landeconomics.umn.edu/

26. Landlord Worksheet

27. Landowner’s Cash Rent Worksheet ExampleYour Farm (A) Farm Size in Acres (tillable acres) 156 ___76______ (B) Value per Acre $6,500 __ $7000___ (C) Total Farm Value (A x B) $1,014,000 __$560,000_ (D) Desired Return on Investment (C x 3.5%) $35,490 __$19,600__ (E) Real Estate Taxes (A x $28.00) $4,480 ___$2,240__ (F) Liability Insurance $200 ____$200___ (G) Other Cash Costs (repairs, pump, Etc.) 0 _____0_____ (H) Total Desired Return (D+E+F+G) $40,170 __$22,040___ DESIRED RENT PER ACRE (H/A) $257.50 __$282.50*__

28. Tenant Worksheet Operator’s Cash Rent Worksheet

30. A Rental Rate That Works

31. In a fair and profitable rental agreement the farmer makes a profit and the landlord receives a fair rental payment.

36. Flexible Leases

38. Flexible Rents based on gross revenue: This is a rental agreement where rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined. Base rents plus a bonus: This is a rental agreement where a base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal. Then these additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together or price alone as well. Flexible rent based on yield only: This is a rental agreement where the landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment. This can also be done with a cash payment based on yield and then price at an elevator. Flexible rent based on price only: This is a rental agreement where the rental payment is based on crop prices. Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to. Rental payments can be made at the quarterly price setting times or half and half or after harvest. Profit sharing flexible rent agreements: This is a rental agreement where the landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.

39. Worthington Yearly Average Cash Prices

40. 2013 Corn Using 67% of Net Income before Rent & Labor Assumes corn input costs of $567 per acre

41. 2013 Soybean Using 67% of Net Income before Rent & Labor Assumes soybean input costs of $268 per acre

42. 2013 Corn and Soybean Average Using 67% of Net Income before Rent & Labor Soybean and Corn Yields

43. Rental Lease Examples

44. 2013 Crop Budgets for Southwest Minnesota Prepared by David Bau, Regional Extension Educator, Ag Business Management August 2012

45. What is a Fair Rental Agreement?

46. $360 $90 $240 $390 $120 $270 What is a fair rental rate? $150 $510 $480 $300 $180 $420 $210 $330 $450

47. In a fair and profitable rental agreement the farmer makes a profit and the landlord receives a fair rental payment.

48. Initially: Base Rent with a flexible component, farmer makes a profit and the landlord receives a fair rental payment. Then: Devise an agreement where share extra based on yield, price, gross, net. You decide what works for both parties

50. Over 1200 people attend workshops • Roughly 1/3 farmer and 2/3 landlords • Rated workshop 4.22 on 1-5 scale. • Farmers averaged 793 acres • Landlords 177 acres Group Total 387,226 acres • This accounts for over 2.5% of corn and beans planted in Minnesota in 2011. • Attendees stated average value of workshop $139 for total of $158,738