Tight markets push rental rates down
August 18, 2016
In agriculture, a handshake is often as good as a signature.
On September 1, 2016, all verbal leases for agricultural ground in South Dakota will automatically renew. Terms of these oral agreements will then be binding unless written notice from either party is given before the upcoming deadline. Changes to a lease are then eligible to be implemented on March 1, 2017.
"Oral leases have been traditionally used in many agricultural contracts over the years, but as the aging rancher passes on the reins to his off-the-farm children, they often want a complete written contract to know exactly how much mom or dad has to live on and what the terms of the agreement are," said Heather Gessner, South Dakota State University (SDSU) Extension livestock business management field specialist. "A complete written rental agreement offers more clarity to both parties and keeps everyone on the same page. A contract should include who the land is rented to, when payment is due, the per acre rate, stipulations for grazing, hunting or other land use restrictions, and any weed control, snow removal or fencing agreements."
Gessner recommends that landowners and tenants utilize templates found at http://www.aglease101.org for putting together a rental agreement.
"The website offers templates that folks can easily fill in the blanks and have all of their bases covered for a contractual agreement," she said. "It's an easy tool for producers to take advantage of if transitioning from an oral to a written contract."
In July, SDSU released a report titled, "South Dakota Agricultural Land Market Trends, 1991-2016: Results from the 2016 South Dakota Farm Real Estate Survey." Compiled by Jack Davis, SDSU Extension crops business management field specialist, and Shannon Sand, SDSU Extension livestock business management field specialist, the report includes information on current agricultural land values and cash rental rates by land use in different regions of South Dakota. While the complete study can be viewed on SDSU's igrow.org, highlights from the report include:
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• "Agricultural land value changes in the past year reflect the sharp declines in crop prices and returns… From 2015 to 2016, all agricultural land values decreased by 2.4 percent, compared to an increase of 1.4 percent from the year before and increases varying from 6 percent to 33.6 percent for the prior three years. In 2016, rangeland and pasture values increased by 2.9 percent. This was down from the double digit increases in rangeland and pasture values in previous years."
• "From 2015 to 2016, average statewide cash rental rates decreased $4 per-acre for cropland, increased $2.15 for hayland, and decreased $1.88 for rangeland. Current average rates of return on agricultural land in South Dakota remain very low. For 2016 the average ratio of gross cash rent to current land value was 2.7 percent for all agricultural land, 3.3 percent for cropland, 3.3 percent for hayland and 2.4 percent for rangeland. During the 1990s, the same ratios were 7.4 percent for all agricultural land, 8.0 percent for cropland, and 6.8 percent for rangeland."
• "Within each region, differences in land productivity and land use accounted for substantial differences in per-acre values. In 2016, rangeland value varied from $2,781 per-acre in the East-central to $715 per-acre in the Southwest. In February 2016, the value of South Dakota native rangeland averaged $1,222 per-acre, a 2.9 percent increase from 2015. The average value of tame pasture was $1,704 per-acre, this is a decrease of 6.4 percent in the past year."
"Grain producers are going to be facing tighter margins this year, so there is going to be some downward pressure on rental rates," said Nate Franzen, First Dakota National Bank Agri-Business Division president. "The downward trend in cattle prices is a few years behind grain prices, so the cow-calf guy, who typically drives pasture rents, will probably be okay this year. I don't see pasture rental rates going much higher than they are right now."
Franzen said the grain super cycle from 2008-2013 spiked pasture prices as acres of grasslands were plowed for corn and soybeans. With less available grass in the market, cattle producers are facing more competition in the market place.
"If we stay in a lower protein market, which looks like that's where things are headed, we could see some softening of pasture rents," he said. "We might start seeing renegotiations of rental agreements in the next year, particularly with cropland. Producers know their inputs, and the rates from the super cycle aren't sustainable at today's commodity prices. Proactive producers have gone out and had those tough discussions with the landlord, but with mixed results. Some who have longterm relationships with the tenant are willing to be flexible and make adjustments. If we put ourselves in the landlord's shoes, he doesn't want to take a pay cut either, so if the neighbor is willing to pay a higher rate, you can't blame the landlord for not being willing to renegotiate rates."
If producers opt to give up the lease, new land will become available offering new opportunities to producers; however, Franzen said if land in larger quantities is up for grabs, it will likely put some downward pressure on the rental rates.
"The tough part about talking land rental rates is we can see some really wild swings in various areas of the state," he said. "If you have some aggressive farmers in your neighborhood, rates won't drop as fast. If you live in a more conservative area, and folks aren't willing to pay up, those rental values will adjust quicker. I think in the next couple of years, we will see some downward movement on these rates across the board."
Facing another tight year with lower commodity prices, producers may be forced to sit down and renegotiate their rental agreements or risk losing some pasture and having to sell off some cows, said Gessner.
For producers wishing to discuss or renegotiate their rental agreements with landlords, SDSU Extension has a crop and livestock budget calculator that both parties can use to evaluate expected expenses and actual input costs and determine a fair agreement for both the landowner and the tenant. The crop and livestock budget calculators can be found at http://www.sdstate.edu/economics/extension-and-outreach.