Prepare to Negotiate

February 28, 2012 09:04 PM

Rising land rents put premium on producer sales skills

Strong commodity prices and profits for several years running have put landlords in the driver’s seat, with demand for farmland far exceeding supply. While producers might be tempted to let parcels go, crunching the numbers shows that in some cases forgoing a bump in rent of $100 per acre or more can actually increase production costs, says Bret Oelke, University of Minnesota agricultural business management specialist.

"In one example, cost of corn production actually goes up by 13¢ per bushel if a parcel of land
is let go when rent increases from $180 to $280 per acre," Oelke explained at the Top Producer Seminar in Chicago.

The per-bushel jump stems from fixed machinery costs spread over fewer acres (see table). Even if profitability per acre declines with increased rents, there are fewer acres and thus less overall decrease in profit. This is not the case with every rental increase, but it points to the importance of producers doing their homework.

When the rental rate increases with one landlord, Oelke said, it’s important to have discussions with other key landlords even if their rental rates haven’t changed yet.

"Communication is key," he said. With some landlords, it might be in a farmer’s best interest to renegotiate a rent midstream, even if the agreement is not up for a year or two.

Word travels fast and producers are better off informing landlords of increased rents than having
the landlords hear about it from somebody else.

It’s also in producers’ best interest to explain their costs and returns to landlords. For example, fuel costs have skyrocketed from $35 per acre to nearly $70 in three years. Other price hikes to mention include fertilizer, seed and machinery.

Some producers deal with landlords who believe their land is worth as much or more than anything around. If that’s the case with you, devise a flexible lease based on actual production, costs and returns, Oelke advised.

"There are at least 25 ways to structure such a deal," he added.

One way is to base the crop’s value on crop insurance data or publicly reported prices. In other cases, producers can use actual returns, which requires a great deal of trust.

It’s important to approach the negotiation process with a win-win, rather than win-lose, attitude, Oelke said. "However, if your landlord is after bragging rights, you may have a problem. Sometimes the best thing is to walk away."

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