Land Lease Education Program

1. Land Lease Education Program Ron Haugen North Dakota State University Extension Service 2014 Women in Agriculture Educators National Conference Indianapolis, Indiana April, 2014

2. Acknowledgments: Dwight Aakre, North Dakota State University Extension Service, Farm Management Specialist Willie Huot, Grand Forks County Extension Agent, North Dakota State University

3. North Dakota Crop Budget Regions

4. North Dakota Land Rents by Region 2008 and 2013 NE NC NV NW $36.50 $50.20 $38.00 $55.50 $55.50 $92.70 $28.00 $36.80 EC $39.50 $66.80 SV SC $71.00 $117.00 $30.00 $57.10 SW $27.50 $37.70 SE $52.50 $94.00 Source: North Dakota Ag Statistics Office of USDA

5. Background: Land Ownership • Agricultural land ownership has remained stable over the past five years. The 2007 Census of Agriculture shows that 62 percent of farmland in the U.S. is owned by the operator. Areas with more cropland, such as the Midwest, tend to have a greater percentage of rented land. • In North Dakota approximately 66 percent of land is rented and 33 percent is owned by the operator

7. Core Topics • What is an equitable share agreement? • Flexible cash rent agreements • What can you afford to pay for cash rent? • Landowner/tenant communications • Other current event topics were presented at sites including marketing and production information

8. Fixed and Flexible Cash Rental Arrangements

9. Fixed Cash Rent Methods • Cash rent market approach • Landowner’s cost or desired return • Landowner’s adjusted net-share rent • Operator’s net return to land • Percent of land value • Percent of gross revenue • Dollars per bushel of production • Fixed bushel rent

10. Putting Flexibility in Cash Rent Agreements • Crop-share leases were the original flexible rents • The scale of today’s operations makes share rents somewhat impractical • Cash rents may be adjusted by market prices, crop yields and production costs

11. Advantages of Flexible Cash Rents • Landowner shares in additional income from: • Price increase • Yield increase • Reduced risk for operator when: • Prices drop • Yields are reduced

12. Disadvantages of Flexible Cash Rents • Increased risk for landowner • Landowner may be concerned about accuracy of reported yields • Higher rent due to increased yields means the operator may be giving up some of the benefit from managerial input • Calculating the rent requires more management and communication

13. Methods of Flexing Cash Rent Flexing for Crop Price Only • Increases risk substantially for operators Example 1 Base rent multiplied by ratio of current year’s price to base price Base rent x (current year’s price ÷ base price) = current year’s rent $40 x ($7.50 ÷ $7.00) = $42.86

14. Flexing for Crop Price Only Example 2 Rent equal to the value of a fixed amount of commodity “The amount of cash rent is equal to the value of 5 bushels of HRS wheat based on the average daily closing price for the month of September.” 5 bushels x $7.50 = $37.50

15. Flexing for Crop Price Only Example 3 Base rent with stated adjustments for prices outside a specified range Owner and operator agree on a rent of $40 per acre if the current price of wheat is between $6.00 and $7.00 per bushel. For each $0.25 change in price above or below this range, the rent will increase or decrease by $1.50 per acre.

16. Flexing for Crop Price Only Example 4 Minimum base rent with upward adjustments. Owner and operator agree to a base rent of $35.00 per acre if the wheat price is $6.50 per bushel or less. For each $0.25 per bushel increase, the rent will increase $1.50 per acre.

17. Flexing for Yield Only Example 1 Base rent is multiplied by a ratio of the current yield divided by a base yield to calculate current rent $40 x (38 bu. ÷ 35 bu.) = $43.43

18. Flexing for Yield Only Example 2 Actual yield is multiplied by a fixed value per bushel decided in advance Rent equals actual yield times $1.20 per bushel for wheat 38 bu. yield x $1.20 = $45.60 per acre

19. Flexing Rent for Price and Yield Current Price Current Yield Base Rent x ----------------- x ----------------- = Rent Paid Base Price Base Yield

20. Flexing for Price and Yield Example 1 Operator and landowner agree to a base cash rent tied to a base yield and a base price Base rent x (current yield ÷ base yield) x (current price ÷ base price) $50 x (38 bu. ÷ 35 bu.) x ($9.00 ÷ $8.00) = $61.07

21. Flexing for Price and Yield Example 2 Rent equals an agreed upon percentage of crop value 35 bu. x $8.00 x 20% = $56.00 • Total rent payment is flexible • Nearly identical to a crop-share lease • Appropriate percentage different for each crop • Percent share may change over time

22. Flexing for Price and Yield Example 3 Minimum base rent plus a bonus Rent equals $40 plus 25% of total revenue per acre above $245.00 per acre Actual revenue = 36 bu. x $8.00 = $288.00 Rent = $40 plus 25% x (288-245) = $50.75

23. Base Rent Plus Bonus (Flex Rent) Provides for a base rent plus a bonus if total revenue exceeds some level Example Base Rent = 10% below average cash rent Revenue Threshold = farm’s average yield times spring insurance price Landowner Share Above Threshold = one third

24. Flexing Rent on Price, Yield and Input Costs • Price and yield are both important. However, it is the margin over direct costs that pays rent. • Price volatility for input costs is increasing. • Including the cost of seed, fertilizer, pesticides and diesel, and drying fuel will further protect the margin for the operator.

25. Flexing Rent on Price, Yield and Input Costs Example Base rent is multiplied by a factor for price, yield and input costs $50 x (current price ÷ base price) x (current yield ÷ base yield) x (base input costs ÷ current input costs) = current rent

26. For Success or Flexible Rents • Base rent, yields, prices, and input costs MUST be determined up front • All details must be clearly stated in the contracts • Yield, price, and input cost information needs to be identified for each crop grown • Contracts should be reviewed annually • Good relations between parties is a must!

27. Affordable Cash Rent

28. EXAMPLE

29. Landlord/Tenant Communications

30. Farm Resume • Management objectives • Experience and advanced training • Education • Occupation, family, organizations and community service • Environmental statement • Risk management strategies • Communication • Insurance coverage and primary financing • References • Newsletters • E-mails • Websites

31. Program Administration • Collaborated local county agents and sponsors • They helped with meeting locations and refreshments • Used TurningPoint interactive ‘clickers’ to gather audience responses

32. Number of Meetings and Attendees • 33 workshops at 26 locations • 1029 attendees

33. North Dakota Land Lease Meetings 2012-2014 2012 Workshops Other Mtgs Ag Lenders Conf Farm Mgmt Class 2013 Workshops 2014 Workshops

35. Make-up of Workshop Attendees • Farm operators/Land owners (landlords) • 45% farm operators • 55% landlords • Lenders • Farm managers

36. In five years land rents will be _______ compared to today? • Lower • Same • Up 10% • Up 20% • Up more than 20%

37. Where will the costs of variable inputs be in 5 years? • Lower • Same • Up 10% • Up 20% • Up more than 20%

38. What is an equitable share rent for wheat with the landowner contributing only land? • 15/85 • 20/80 • 25/75 • 30/70 • 33/67 landowner/operator

39. Do you have any flexible rental contracts now? • Yes • No

40. If you have a flexible rental contract today, what factor(s) are used to adjust the rent paid? • Price of crops produced • Crop yields • Price of inputs • Gross revenue (yield x price)

41. Evaluation

43. Take Away Points • Need for further land lease education • Tighter crop margins will make lease arrangements a more critical risk management decision. • Landlord/Tenant relations • An old and ongoing issue • In most cases, more open and frequent communications creates a better working relationship between the parties

44. Thank You! Any Questions? Contact Information: Ron Haugen 701-231-8103 ronald.haugen@ndsu.edu Dwight Aakre 701-231-7378 dwight.aakre@ndsu.edu Willie Huot 701-780-8229 wilfred.huot@ndsu.edu