Negotiating reasonable land rent in times of low market prices
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EmailHow can you, the farm manager, help your landowners understand the impacts of lower prices and high input costs on profits?
Lower commodity prices can put a strain on revenues and farm profits, even with record yields. Strained profits are common when input costs are closely tied to farm production and remain relatively higher compared to prices. In those types of years, it’s easy to focus on high costs of fertilizers, fuels or other input needs. But an equally important cost is the rent paid on farmland.
As commodity market prices go up, there is a strong likelihood that landowners may want to increase the rental payment they are receiving. This is often based on a perception that high market prices lead to higher revenues and automatically greater profits. But when prices go down, landowners don’t necessarily have the reverse perception of lower revenues or poor profits. Especially if markets are volatile and input costs remain high.
How can you, the farm manager, help your landowners understand the impacts of lower prices and high input costs on profits? How can that conversation help negotiate continued use of the farmland at reasonable rates? MSU Extension recommends some key areas to focus on when communicating with your landowner:
Costs of the farm business
The key to communicating costs to a landowner is to understand that less is more. Landowners are not necessarily interested in the details behind every cost the farm incurs. The goal is to review relevant or compelling costs that will impact the farm’s profitability and what reasonable land rent should be. A few discussion points include:
- Focus on specific line items that vary from year to year. If the costs of high-value inputs haven’t significantly decreased with commodity prices, it may be worth going over. For example, fertilizer costs remain higher compared to market prices during the same period.
- Group similar costs together into a cost area. Then you can discuss their importance without going into detail on each specific line item. For example, costs associated with custom operating, machinery leases and hired labor may be called hired costs.
- Don’t get lost in the details. It’s okay to share details but the key is to avoid oversharing. In-depth conversations on every cost could lead to unintended scrutinizing of the farm’s production activities; not just the costs involved in them.
Revenues of the farm business
Revenues are a bit more of interest to landowners. If the farm can generate income, it means they can pay the rent. The key is to focus on what the farm actually receives.
- Landowners are often not aware that the actual price received is not the futures price. Explaining this difference in prices doesn’t require in-depth discussions on marketing. For example, “The cash price we receive to cover our costs is after the grain elevator subtracts its costs. Cash prices are roughly about (insert value)…” Talking about actual prices does help to shape the overall conversation on profits.
- Landowners are not necessarily aware of price volatility. This is important to bring up in your discussions on prices and revenues. Understanding volatility helps to explain why the average price you receive is not the high price seen in the market reports.
Showcase your strengths as a farm tenant
It’s important to remember that the value of the property is driven by its potential for profits. That potential is established or maintained by the farmer renting it. This presents an opportunity to showcase your farm and your ability to serve as a steward for the landowner’s property.
- Providing landowners with a production update. Updating the landowner on farm activities at various points of a growing season helps to build a good rapport. Providing production updates is a good way to educate landowners on farming practices and significant changes. Changes in cropping plans or market conditions are important for landowners to know about, especially if they affect profitability.
- No two farms are alike. Your farm has its own approach to achieving high yields and reaching profit. How that compares to other farms within the industry, or in the local area, is an important distinction you want to highlight. Using a benchmarking database, such as FINBIN, you can determine where your farm ranks in the industry and share that with the landowner.
- Review recent soil test results and how they impact production. Discuss how you’ve increased or plan to increase soil health, such as routine lime applications or use of cover crops. This demonstrates your efforts to retain value for both you and the landowner. Having this dialogue routinely, not just during rent negotiations illustrates those efforts are made regardless of market prices.
- Discuss production capacity and your yield history. Highlight your success at achieving or exceeding the farm’s capacity. This is especially important if you’ve made investments in productivity improvements, such as tiling or irrigation. Focusing on your success both before and after those improvements confirms your contributions to land value. It also emphasizes what may be lost if the property were rented to someone else.
- Don’t forget to talk about the extras. Often, landowners may ask for assistance in maintaining the visual appearance of the property. Whether that’s trimming tree lines or mowing roadsides, these extra activities provide added value to the property. They also showcase your value as a tenant, especially if you do them without any compensation from the landowner.
Talking through these areas will help your landowners to better understand the farm business and its contributions to land value. This helps to keep rental payments reasonable during times of low market prices. It also creates long-lasting relationships that benefit both producer and landowner.
For additional information on the negotiation process, review MSU Bulletin E-3427: Introduction to Renting Farmland.
Additional resources related to leasing farmland are also available at MSU Extension’s Farmland Leasing homepage. Resources include fact sheets on land rent considerations, a land rent calculator, the latest data from USDA on rental rates and more.
