Own or rent crop land?
Own or rent crop land?
by Greg Booher, farm business instructor with the Wisconsin Technical College System in Cleveland, Wisconsin.
A year ago I wrote a several articles that were published in several regional publications regarding land rents in south eastern Wisconsin and the mid-west. When I wrote the articles I expected to get back lash from concerned producers, and - I got just that.
I am old enough to identify with the old adage, “what goes around – comes around.” If you didn’t grow up in Appalachia you might not be familiar with the saying. Or if you are familiar with adage, you may well be a red neck. The term means; the status of many things will eventually return to its original value after completing a cycle. A retreat towards the original value does certainly appear to be the case with the grain markets in 2013.
I can remember in the early 70’s corn selling for one dollar a bushel and through most of the 1980’s up until the mid-90’s, corn sold in the $2.50-$3.00 range. The articles I wrote and year ago hit a sensitive nerve with farmers renting acreage. The producers leasing the land obviously do not want to pay any more than required to secure the rented acreage. On the other hand, landlords want to rent their land to the highest bidder.
From the early 70’s, when I started my career, corn production was not a very profitable venture. Corn and soybean farmers spread their cost by getting higher yields than their neighbor, farming more acres to spread their overhead and received government subsidies.
Over the last 40 years, I counseled producers to not grow corn for grain. Dairy farmers could maximize their incomes by growing corn for silage and hay to feed their growing herds. The required corn to feed the cows could be purchased near the cost of production or below through a feed supplier. Growing more forage and adding more cows created more net income than growing corn for sale. However, older farmers cautioned this mentality. The old times were right this did eventually turn around.
Then in the late 1990’s the United States decided we needed to be less dependent on foreign oil by using corn to produce ethanol. Government ethanol inclusion mandates and subsidies helped make the industry profitable. Believe it or not, some 42% of the nation’s corn crop now goes to feed ethanol digesters. With a limited supply of corn and a high demand for corn - walla, there you have it – sky rocketing grain markets and escalating land rental rates. It just isn’t the corn market affected by the rise in the ethanol industry because as the corn acreage increases there are fewer acres available for soybeans, cotton, wheat, hay and other crops. Therefore the prices of all these commodities increase. You, the consumer, have a more stable source of energy but pay the price at the grocery store.
What goes around comes around because of how fluid our markets can be. As the corn price increased to the$7.00 per bushel range, many ethanol plants went out of business while at the same time producers responded to the carrot dangled in front of them by planting more corn.
Since 2006 the land rental rates followed the grain markets up. It was my position, during this time, to educate the landlords about fair rental rates. Fair rental rates meaning - fair to the landlord and fair the renter. There are many things to consider when renting farm land. Will the renter be required to maintain the phosphorus and potassium soil tests at the present levels? Will the renter be required to use a crop rotation plan including small grain and or hay crop? How big are the fields to be rented? How productive are the soil types of land is involved? Is the land to be rented highly erodible? Even terms about who will mow the right-a-ways and remove snow all go into deciding on a fair land rent.
Using an average land rental price over a 5 year period or a crop share arrangement can allow both the landlord and renters to share in the ups and downs of the business.
Landlords are advised to keep in mind the needs of their current tenants. Being fair over time is important. Decisions you make as a landlord can have very negative effects on your current tenant. Use open communication with your tenant to come up with a rental agreement that is fair and equitable to both parties. Rental agreement templates are available to help producers and landlords prepare comprehensive agreements.
So to redeem myself with those producers who legitimately felt I had influenced landlords to raise their rental rates; it is now fair that the landlords reduce their rental rates in response to the lower corn market that appears to be the situation for this fall. The December corn market has dropped from the mid $7.00 per bushel range to under $5.00 at this time. If your rental agreement did not include clauses to allow the rental rate per acre to float with the markets; it is time to lower the rental rates since the corn market is down nearly 30% from the highs of 2011 and 2012.
Greg Booher can be reached at 920-960-0551.