Serving Minnesota and Northern Iowa.

David Bau offers tips for negotiating fair rental rates

By Janet Kubat Willette

Date Modified: 12/12/2012 9:06 PM

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LE CENTER, Minn. – What's your rental rate?

$90? $320? $165? $510?

Any of those amounts may be the right for a specific parcel of land.

Many factors go into deciding what rental rates should be, said University of Minnesota Extension educator David Bau, at a land rental rate meeting held Nov. 28 in Le Center.

Bau has traveled the state since early November giving his "What is a Fair and Profitable Rental Agreement" presentation.

The presentation is packed with numbers and sample worksheets to guide owners and land operators as they negotiate rental rates, the majority of which are negotiated between September and the end of the year.

About 80 percent of rental agreements in Minnesota are cash agreements with a set payment either in the spring, the fall or half and half. Another 10 percent are share-crop agreements and the remaining 10 percent are flexible cash leases, where the land owner and land operator share risk.

Bau encouraged the roughly 25 people at the meeting in Le Center to consider flexible cash leases as they share the risk between land owner and land operator.

Land rental rates have increased along with land prices, crop prices and farm income, but if farmers harvest a good crop and crop prices fall, they won't be able to continue paying those high rents. Instead of having a base rental rate of $400, for example, have a base rental rate of $200, with a flexible cash lease that may net the landowner $400 per acre in good years.

Historically, cash rent was 40 percent of soybean gross income and 33 percent of corn gross income. Over the past 15 years, land rental rates have been 67 percent of net farm income. Over the last five years, rates have dropped to 49 percent of net farm income.

Bau prefers the 67 percent number because it's the historical average.

In the end, the goal is to set a rental rate where the operator makes a profit and the land owner gets a fair rental payment, Bau said. The agreement has to work for both parties.

Land values

While the average state farmland rental rate increased by 10.2 percent from 2007 to 2011 and by 13.1 percent from 2010 to 2011, it's anybody's guess where farmland prices will end up in 2012.

Land sales of $14,000 per acre have been reported in Murray and Winona counties. Land in Goodhue County sold for $9,950 last month. In 2011, the average sale price of farmland in 33 southern Minnesota counties was $4,800 per acre.

The data for 2012 – the year ending Sept. 30 — is not yet available on online databases, but Bau expects the average sale price to be higher. He won't speculate on a number.

The increase has been driven not only by higher grain prices, but also other factors outside agriculture. Those external factors include: The low interest rate available at banks; dismal returns from the stock market since 2001, the European debt crisis and the looming fiscal cliff. Meanwhile, land has a 3.5 percent rate of return on investment. Land has proven a safe place to invest in these risky financial times.

Where else can you get a 3.5 percent return on investment? Bau asked. He used the number as an example. Iowa State uses 3 percent as their rate of return number.

What will happen next year if we get a good crop and grain prices drop? Land prices will likely decrease, but not right away, he said. Land investments are usually made long-term.

Farmers who buy land now pay with cash and bankers are loaning conservatively.