Land-rental agreements hinge on several factors

posted Dec. 26, 2017 7:13 a.m. (CDT)
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by / Benjamin Wideman Regional Editor |

  • BW Land Rentals 122717
    When it comes to land-rental agreements, there are many factors to consider for both landowners and agricultural producers.
  • BW Scott Reuss Headshot 122717

OCONTO FALLS — Scott Reuss fields plenty of questions in his role as the UW-Extension crops/soils agent for the northeast Wisconsin counties of Marinette, Oconto and Florence.

But one question in particular gets asked quite frequently.

“One of the most common farm-based questions I get is from a landowner who calls and asks, ‘How much is my land worth if I rent it to an agricultural producer?’ ” he said. “But there are so many factors to consider, I can’t give them the quick and easy answer they want.

“That’s why I do workshops annually, to let people know about the many factors out there because it’s probably one of the most common sets of questions I get throughout the year.”

And considering the less-than-ideal situation facing many producers lately, 2018 figures to be another year filled with land rental questions from both landowners and producers.

“I honestly submit that 2018 is going to be a year where landowners in some of our areas are either going to have to accept a little bit less in rent or they’re going to have to do some more work” finding new tenants, Reuss said. “Because there are going to be producers who tell landowners, ‘I cannot afford to rent it at this rate. I don’t want to lose it, but I can’t lose the farm because I’m paying you too much.’ We had a handful of producers do that last year already, and the situation is worse going into 2018.”

Reuss led two land-rental workshops earlier this month — one in Coleman on Dec. 7 and another in Oconto Falls on Dec. 12. Although much of the discussions focused on topics in his counties, the principles covered could generally apply to landowners and producers throughout the state.

As part of the Oconto Falls session, Reuss showed a map of the nation with a state-by-state breakdown of cropland cash rents in 2017 as compared to the year before. Many states, including all of Wisconsin’s border states — Minnesota, Iowa, Illinois and Michigan — saw decreases in rental rates. But Wisconsin’s rate increased by 1 percent.

“How often in life do we see prices going down? Not all that often,” Reuss said. “So for agricultural land rent to go down, that’s a pretty significant thing. That shows the agriculture economy across the vast majority of the country isn’t in a good setting right now.

“But Wisconsin was an exception. Why? We still have increasing cow numbers and more gallons of manure.”

Several factors can dictate land rent values. As with most real estate, location is high on the list.

“The farther you are from your field, the more it costs you to farm that field. That’s just a reality of life,” Reuss said. “Farms want to have neighboring fields.”

Related factors also include soil type, parcel size, soil fertility, soil drainage, wildlife damage and growing season. In addition, both parties need to be aware of length of a lease, Farm Service Agency base acres and yields, government programs on the land, and what specific agricultural practices are permitted. Some landowners, for example, may forbid the use of manure or pesticides.

“The more you don’t want to allow, the greater the chance you’re probably going to get less for your land in the long run,” Reuss said.

Although he noted that land is worth whatever a landowner can get for it since it’s driven by the market, Reuss noted that landowners and producers who work together to build good rental contracts are more likely to form longer-term relationships that benefit both parties. Having flexibility and understanding agricultural realities allow landowners to capture maximum value from their land investment while still allowing a profitable opportunity for the producer renting the land.

Among the other key topics in Reuss’ 90-minute land-rental presentation:

• Pros and cons of cash vs. crop-share agreements

• Methods for collecting land-rent bids (the most common are open announcement and invitation only, but land rent auctions and land managers are utilized on occasion)

• Cropland rent-to-value ratios, which in Wisconsin typically range between 2.5 percent and 3 percent

• Advantages and disadvantages of flexible cash rent options, and some of those methods (such as crop price only; yield only; price and yield; and price, yield and input costs)

• The importance of contracts, especially when agreeing on anything other than cash, fixed-rate options

Reuss emphasized that each situation is unique to the landowner and agricultural producer negotiating a particular contract. He said UW-Extension officials in people’s respective areas can provide further information specific to that region.

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