NDSU Extension Service - Dickey County

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How to Figure Flexible Crop Rental Rates

Breana Kiser, Agriculture and Natural Resource Agent

Flexible Crop Rent ImageWhen trying to decide on a rental rate for crop land there are 5 factors to consider before deciding on the rate.  The most important piece before starting this process is communication between the landowner and renter.  Each piece should be discussed among the parties before coming to an agreement.  With the world we live in today, it is common for land owners not to live near the land they are renting therefore they are not aware of the situations that may occur.  Communication is the key when you start this process.  Now looking at factors to consider within this discussion.

Step 1: Productivity

Not all soil is created equal.  Productivity of the land is an important factor when looking at land for a cropping system and needs to be considered when deciding on the rental rate.  When looking at the soil profile of a field, a good practice is know the soil type (sand, loamy, or clay) and knowing the productivity index.  There is a couple of ways to figure what your soil profile is.  You can visit me at the Extension Office and I will be glad to help you gather this information.  Your Soil Conservation District can find the same information or you can find it yourself on the Web Soil Survey site.  

Once knowing your productivity, you will see what the average productivity value is of the land.  From there you can assess whether the land has a low, average, or high productivity index.  Now productivity index is not the whole story but merely a piece. 

Step 2: Rent & Values

Every year the rental surveys are distributed and are cataloged to find the values for each year.  These new values are published around the beginning of April. The Extension office has the publication for you as hand-outs, you can call and get the values, or you can find the pdf on the ND Trusts Lands or on the NDSU Extension.  The 2017 non-irrigation crop land rate values are at a minimum rate of $70/acre, maximum rate $175/acre, most frequent rate $125/acre, and average rental rate is $116.40. 

Step 3: Projected Crop Budget Margins

Each year NDSU Extension sends out a publication with the projected crop budgets for that year.  This is a helpful tool for farmers to use to estimate margins for the future year.  This publication can also be used to consider the rental rate value depending on what the margins are.  Within the publication, the line item titled return to labor and management, is an estimation of the return from crops produced within a production year per acre.  A note to remember is that cost of living which is $30-$50 per acre is not considered with the estimations of the return in the publication.  Before increasing or decreasing a rental rate, for a fair value both parties can look at the margins to predict what the year may have in store for farmers.

Step 4: What’s most important?

The land owner and renter should have a discussion to listen to each other’s values that would guide their decision process.  There should be discussion about the history of the land and how it has been used over time.  Landowners want to have top dollar for their land but renters want a reasonable value so they can make a profit.

 There are a few questions that need to be answered within the discussion of the value.  If crop markets are low, should the renter have a break in rental value?  If the renter takes care of the farm site as well as the land, should the value be lower?  Should the value reflect if the renter is top, average, or poor manager of the land?  There should be trust when discussion the deal of renting land, the landowner wants to trust the renter by knowing that the check is ‘good’ and that the renter is caring for their land in a sustainable way. 

Step 5: Experience of the Landlord

The last factor that is the experience of the landlord which will help decide on how to handle farmland.  Experience level can help determine the best way to manage land rent.  A landowner with no experience with farming terminology and inherited the land should consider putting the land in a trust which is a useful and flexible tool for estate planning.  A trust requires four basic elements-trustee, trust property, trust document, and known or discernible beneficiaries.  The trust specifies the rules of operation for the trust, the powers of the trustee, the beneficiaries to share in the income and principal from the trust, and instruction for distribution of the trust property.  A trust for a trustee with no knowledge of farming will contain the instructions regarding management of the trust assets which will help in deciding rent values even by stating what those values should be. 

A landowner with limited experience but do understand farm terminology and have farm experience growing up may consider the previous factors and negotiate a cash rent value with renter.  A landowner who is experienced and may have just recently relieve the management duties can figure rent values with a share or with flexing rent on price and yields.  Any party can use flexing rent and the formula is designed to consider changing crop prices and yields to determine a rent price but changes each year with the production.

Flexing rent on prices formula and yield changes is:   

Current Yield           Current Price
Base Rent X ___________________ X ___________________ = Rent Paid
Base Yield              Base Price

For example, a landowner and renter can negotiate what the base rent price for a field that will be planted with soybeans.  The base rent value can be determined with current cash rent, county average rent value, farm business management records, or a mutually agreed upon method. The rate decided on was $120/acre which is a little less than the most frequently used value in Dickey County.

Next is determining the base yield and base price.  The base yield can be decided using individual farm records, FSA proven yields, FCI yields, county yield data, farm business management records, or a mutually agreed upon method.  The yield decided on was based on county yield data from NASS at 46 bu/acre.  The base price can be determined from where and how the grain is normally marketed, Sept/Dec futures minus local basis, new crop contract bids in early spring, or other mutually agreed upon methods.  The base price was determined by an estimate looking at the prices from the previous harvest season which was $10/ bu. 

Then the current yield and current price need to be determined.  Current yield can be determined by using yield monitors, bin measurements, or elevator receipts/ scale tickets.  The value was determined 40 bu/acre from previous yields. Final price can be determined using the contracted price, futures minus basis at a given location, harvest price on a certain date, or average local price during growing season.  The value decided was determined from the NDSU Extension projected 2018 crop budgets and rounded by to $9/bu. 

With all the values decided the flexing rent value agreed on was $97.82/acre for the rent value. For success using flexing rent value, the base rent, yields, and prices must be determined up front.  Yield and price information need to be identified for each crop grown.

Keys to successful partnerships between renter and landowner are rental agreements must have all details clearly stated in the contracts.  Contracts should be reviewed annual.  The final piece is that there must be good relations between the parties so the rent value is fair and everyone is happy.  Any questions or help finding the values or factors for your land rent please contact the NDSU Extension office. 

 

     

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