1. Copyright @ 2012-13 University of Minnesota All Rights Reserved. What is a Fair & Profitable Rental Agreement ? 20 Location across Minnesota David Bau Extension Educator Agricultural Business Management University of Minnesota Extension bauxx003@umn.edu

2. Copyright @ 2012-13 University of Minnesota All Rights Reserved. TODAY’S AGENDA: FINBIN DATA Increasing Input costs Minnesota Agricultural Statistic Information Farm Land Rental Rate Trends Land Values Landlord Worksheet Tenant Worksheet A Rental Rate That Works; Excel Spreadsheet Flexible Leases Rental Lease Examples What is a Fair Rental Agreement?

3. Copyright @ 2012-13 University of Minnesota All Rights Reserved. FINBIN DATA

4. Copyright @ 2012-13 University of Minnesota All Rights Reserved. CORN Budget Southern MN FINBIN Data Maximum Value Minimum Value Actual 2011 Average 2002-2011 Project 2012 Project 2013 Forecast 2013 Yield per acre (bu.)190.563.62157.85173.41163168176 Operators share of yield %100 100.00100 Value per bu.5.661.735.663.305.856.045.50 Total product return per acre893.43143.38893.43572.72935.10976.77968 Miscellaneous income per acre69.66-1.8136.1914.2034.3332.4710 Gross return per acre929.62213.04929.62586.92969.431,009.24978

5. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Direct Expenses Maximum Value Minimum Value Actual 2011 Average 2002- 2011 Project 2012 Project 2013 Forecast 2013 Seed 102.1125.96102.1165.25$106.34$110.57120 Fertilizer 158.4632.15148.3690.64$154.82$161.27200 Crop chemicals 30.1722.1927.5925.67$27.78$27.9728 Crop insurance 27.132.9323.4915.60$24.63$25.7725 Drying fuel 36.574.285.7514.92$5.61$5.4715 Fuel & oil 34.038.7434.0320.79$35.39$36.7537 Repairs 45.8718.2745.8729.56$47.30$48.7249 Custom hire 10.373.0910.375.99$10.69$11.0111 Hired labor 3.470.151.711.20$1.90$2.092 Land rent 169.3278.76169.32130.49$174.35$179.38220 Machinery & bldg leases 3.250.322.141.88$2.22$2.302 Utilities 1.200.220.000.41$0.08$0.161 Marketing 3.320.303.321.56$3.48$3.644 Operating interest 15.146.9910.1910.36$10.34$10.4811 Miscellaneous 5.880.963.512.93$3.65$3.794 Total direct expenses per acre 587.76216.2587.76417.40$608.40$629.04729 Return over direct exp per acre 349.7-33.01341.86169.52$361.03$380.20269

6. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Overhead Expenses Maximum Value Minimum Value Actual 2011 Average 2002-2011 Project 2012 Project 2013 Forecast 2013 Custom Hire 3.041.740.002.32$0.04$0.072 Hired labor12.024.7412.027.38$12.30$12.5813 Machinery & bldg leases6.451.376.015.06$6.27$6.536 Farm insurance7.372.137.375.24$7.66$7.958 Utilities5.182.125.183.48$5.34$5.506 Dues & professional fees3.400.423.401.67$3.59$3.784 Interest8.284.107.976.92$8.17$8.378 Mach & bldg depreciation49.0918.0549.0931.16$49.96$50.8251 Miscellaneous9.093.919.095.94$9.29$9.4810 Total overhead expenses per acre100.1143.6100.1168.08$102.55$105.00108 Total dir & ovhd expenses per acre687.88263.91687.88485.48$710.97$734.05837 Net return per acre259.05-81.89241.60101.42$258.32$275.03141 Lbr & mgt charge per acre51.1424.1851.1437.20$52.64$54.1450 Net return over lbr & mgt209.07-107.64209.0773.53$225.20$241.3391 Government payments51.95-7.8518.6222.90$18.37$18.1220 Net return with gov’t payments229.05-71.72227.6990.54$243.82$259.95111

7. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Cost of Production Maximum Value Minimum Value Actual 2011 Average 2002-2011 Project 2012 Project 2013 Forecast 2013 Total direct expense per bu. $3.72$1.53$3.722.40$3.74$3.764.14 Total dir & ovhd exp per bu. $4.36$1.83$4.362.80$4.36$4.374.76 With labor & management $4.68$1.83$4.682.87$4.68 5.04 Total exp less govt & oth income $4.01$1.64$4.012.71$4.06$4.104.87 Est. labor hours per acre 3.372.422.822.812.802.582.6

8. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Increasing Input costs

9. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Input costs for corn have been increasing at rate of 9% for corn since 2003. Input costs for soybeans have increased at a rate of 7% per year since 2003. Input Cost Trends

10. www.finbin.umn.edu

11. Copyright © 2011-12. University of Minnesota. All Rights Reserved. Land Rental Rates Ranged from $67.00 to $265.15 per acre This is almost $200 range in 2011 What will it be in 2013 in your area? $300 -$400

12. Acceptable Price Worksheet: Southwest Research and Outreach website http://swroc.cfans.umn.edu/SWFM/farm_mgmt.html Excel spreadsheet to calculate your breakevens Ranges: $4.50 to $5.20 for corn $10.00 to $13.00 for soybeans

13. Corn Cash Rental Payment After $663 per acre expenses including $70 labor charge Copyright © 2011-12. University of Minnesota. All Rights Reserved. Price/Bu130145160175190215 $4.00 -143-83-233797197 $4.50 -78-10.557125192305 $5.00 -1362137212287412 $5.50 52134.5217300382520 $6.00 117207297387477627 $6.50 182279.5377475572735 $7.00 247352457562667842 $7.50 312424.5537650762950 $8.00 3774976177378571057 Yield Per Acre

14. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Minnesota Agricultural Statistic Rental Information

15. Copyright @ 2012-13 University of Minnesota All Rights Reserved. County 201220112010200920082012201120102009 Cottonwood204160146137135NA 3531 Jackson178155 146145 37 NA 28 Lincoln149141132116118 50 NA4328.5 Lyon174146 132121 5 30.547.532 Murray205159158137134 58 34.549.529.5 Nobles185170148141134NA 50.540 Pipestone156140136137118 48 4241.541 Redwood184178156144138NA42NA43 Rock213182172161149 51 NA 43 SOUTHWEST 183159149139NA 49 47 37 Cropland Rental Rates Pasture Rental Rates Minnesota Cropland and Pasture Rental Rates Data provided by the Minnesota Agricultural Statistic Service September 2011 and 2010 and May 2009 NASS.USDA.GOV

16. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Cropland Rental Rates Pasture Rental Rates Irrigated County 201220112010200920082012201120102009 2012 2011 NORTHWEST81.575.56261NA 18.5 13.51212.5 121 NA NORTH CENTRAL NA 23.521.5NA 14 121312.5 133 NA NORTHEASTNA 10.54.5NA 38 58.1NA WEST CENTRAL 128 118108100NA28.522.527.523177155 CENTRAL164151132119NA 15 15.51921 214164 EAST CENTRAL 60 62.5 4644.5NA 12 13.5NA SOUTHWEST 183159149139NA 49 47 37NA SOUTH CENTRAL 216 181162154152 NA 36.54938 NA SOUTHEAST 192 174160151NA30.53431.536 NA 207 MINNESOTA 150 135121113NA3421.52422.5200160 Minnesota Cropland and Pasture Rental Rates Data provided by the Minnesota Agricultural Statistic Service September 2011 and 2010 and May 2009

17. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Farm Land Rental Rate Trends

18. Copyright @ 2011-12 University of Minnesota All Rights Reserved. Average Rents Paid by County'01'02'03'04'05'06'07 ' 08 '09‘10'11 Est. '12 Est. '13 Average Cropland Rental Rates paid in Adult Farm Management FINBIN database. Calculated 2012 and 2013 based on FINBIN rents increased 10.2 percent from 2010 to 2011 multiplied by 2011 rates to estimate 2012 and 15 percent from 2011 to determine 2013 rental rates Southwest Cottonwood93 9796101107108143139148164185204-210 Jackson98101103105109111119146145157167189208-214 Lincoln646974858683107120152163169191211-216 Lyon79808285899294119137140168190209-215 Martin106108110114119121133158177181210238262-269 Murray818286878994100120143154168190209-215 Nobles90919397102103117132140146168190209-215 Pipestone767874819196105110121136150170187-192 Redwood908993929998104122140158173196216-221 Watonwan959396101110114122148146165177200221-226

19. Copyright @ 2011-12 University of Minnesota All Rights Reserved. Average2011 2013 2007200820092010AvgMedian 10 th Pctile 90 th Pctile NASS Est. South Central Cottonwood108143139148164152116207160____ Jackson119146145157167171117208155____ Lincoln107120152n/a 141____ Lyon100119137140168154101207146____ Murray100120143154168169100207159____ Nobles117132140146168156108237170____ Pipestonen/a 140____ Redwood104122140158173175113222178____ Rockn/a 182____ Martin133158177181210189137242190____ Watonwan122148146165177162136222176____

20. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Average Annual Change in Land Rental Rates 2007-2011 2010-2011 Northwest 7.3%13.3% West Central 8.6%10.9% Central 12.1%15.2% East Central n/a Southwest 11.9%11.1% South Central 10.8%12.8% Southeast 10.3%13.7% State 10.2%13.1%

21. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Ag Lease 101 Home Document Library FAQ For Educators About Ag Lease 101 ContactHomeDocument LibraryFAQFor EducatorsAbout Ag Lease 101Contact Ag Lease 101 helps both land owners and land operators learn about alternative lease arrangements and includes sample written lease agreements for several alternatives. Ag Lease 101 was created by and is maintained by the North Central Farm Management Extension Committee.. http://www.aglease101.org/

22. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Land Values

23. Copyright @ 2011-12 University of Minnesota All Rights Reserved. County20112010200920082007 5 yr ave20112010200920082007 5 yr ave Cottonwood165.7180.4183.0170.0164.0172.643.646.547.043.048.045.6 Jackson164.6185.7184.0172.0163.0173.945.048.749.042.549.046.8 Lincoln148.0161.9163.0148.0153.0154.834.444.840.035.046.040.0 Lyon150.6168.5174.0159.0150.0160.434.648.241.037.047.041.6 Martin175.9188.0192.0179.0165.0180.048.049.150.045.549.048.3 Murray168.5186.3183.0170.0153.0172.245.550.347.042.546.046.3 Nobles176.0179.8180.0173.0157.0173.245.150.847.541.548.046.6 Pipestone154.2172.4168.0162.0140.0159.338.348.844.038.044.042.6 Redwood151.0184.0187.0173.0156.0170.237.351.345.542.547.044.7 Rock180.6189.2179.0182.0160.0178.248.854.349.547.051.050.1 Watonwan178.5183.1184.0175.0164.0176.945.048.348.044.048.046.7 Southwest 162.5179.7179.0169.0156.0169.241.549.446.041.547.545.2 Minnesota156.0177.0174.0164.0146.0163.438.545.040.038.042.540.8 Corn and Soybeans County Yields Yields from Minnesota Agricultural Statistic Service Annual Bulletins: 2011, 2010, 2009.

24. Copyright @ 2012-13 University of Minnesota All Rights Reserved. COUNTY 20022003200420052006200720082009201020112012 CHIPPEWA NA $2481$2582$2615$3776$3,932$3,605$3,892$6,024 COTTONWOOD $1467$1625$1854$2439$2853$3005$4423$2,798$3,699$5,424$7,807 JACKSON $1930$1790$2111$2671$2969$3332$4425$3,999$4,100$6,453$5,981 LAC QUI PARLE $1032$1220$1461$1742$1933$2217$2474$3,138$3,326$4,052$4,174 LINCOLN $1029$1223$1172$1509$1624$2401$2343$2,917$2,830$3,464$4,253 LYON $1144$1676$1878$2012$2303$2207$3912$2,908$3,373$5,057$6,284 MARTIN $1930$2091$2476$2871$3092$3478$3783$4,446$4,634$4,509$8,359 MURRAY $1501$1672$2039$2183$2286$2500$3523$3,700$3,919$3,859$5,678 NOBLES $1762$1928$2238$2411$2882$3393$4126$3,939$5,037$4,850$6,109 PIPESTONE $1168$1334$1851$1880$2127$2409$3386$3,680$3,511$4,433$5,615 REDWOOD NA $2705$2743$2880$3759$4,158$4,259$5,445$7,479 ROCK $2066$1926$2139$2369$2992$3912$5052$5,221$4,783 No Sales $7,839 WATONWAN $1858$1842$2193$2337$3112$3103$3642$4,000$4,107$4,983$6,349 YELLOW MED. NA $2055$2537$2429$3203$3,425$3,595$4,515$5,481 AVERAGE $1535$1666$1947$2262$2574 $2849$3702 $3,733$3,913$4,687 $6,245 SW MINNESOTA COUNTY FARM LAND PRICES 2001-2011 Prepared by David Bau, Jim Nesseth 2002-2003 and Erlin Weness 2001 The amounts listed below are the prices paid per acre for total farmland (not tillable acres) in each listed county. The data is from farm sales recorded from January 1 st through June 30 th of the respective years. The data includes only bare land sales. No land and building combination sales are included. The information is from actual arms length sales reported to county authorities and collected by personnel of the University of Minnesota Extension. Sales data was not weighted for acres, each sale on a per acre basis was averaged to get the average price paid per acre. In 2005 added counties Chippewa, Lac qui Parle, Redwood and Yellow Medicine to study.

25. Copyright @ 2011-12 University of Minnesota All Rights Reserved. Cottonwood3934 9545443786510 Jackson4317 9587035457325 Lincoln2914 6303717124166 Lyon4003 19443718326452 Martin5384 9508525536499 Murray3935 15355211725074 Nobles5196 12487828326998 Pipestone3511 4461120266950 Redwood4179 9536738436451 Rock4506 4559230077911 Watonwan 4056 5457735625553 County Average 2010 Per-Acre Price Number of Sales 2011 Average 2011 Per-Acre Price Minimum 2011 Per-Acre Price Maximum 2011 Per-Acre Price Minnesota Farmland Sales 2011 and 2010 Average Farmland Sales from Minnesota Land Economics Steve Taff, University of Minnesota http://www.landeconomics.umn.edu/

26. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Landlord Worksheet

27. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Landowner’s Cash Rent Worksheet ExampleYour Farm (A) Farm Size in Acres (tillable acres) 156___76______ (B) Value per Acre $6,500__ $7000___ (C) Total Farm Value (A x B) $1,014,000__$560,000_ (D) Desired Return on Investment (C x 3.5%) $35,490__$19,600__ (E) Real Estate Taxes (A x $28.00) $4,480___$2,240__ (F) Liability Insurance $200____$200___ (G) Other Cash Costs (repairs, pump, Etc.) 0_____0_____ (H) Total Desired Return (D+E+F+G) $40,170 __$22,040___ DESIRED RENT PER ACRE (H/A) $257.50 __$282.50*__

28. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Tenant Worksheet Operator’s Cash Rent Worksheet

29. Copyright @ 2012-13 University of Minnesota All Rights Reserved.

30. A Rental Rate That Works

31. Copyright @ 2012-13 University of Minnesota All Rights Reserved. In a fair and profitable rental agreement the farmer makes a profit and the landlord receives a fair rental payment.

32. Copyright @ 2012-13 University of Minnesota All Rights Reserved.

36. Flexible Leases

37. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Table 1. Average Southern Minnesota Cash Rent as a Percentage of Gross Revenue Average Cash Rent Paid Per Acre Average Gross Revenue, Dollars per Acre Average Cash Rent as % of Gross Revenue Corn Price Soybean Price Year Southern Minnesota CornSoybeansCornSoybeans 199584.51$330.47$246.6926%34%$2.74$5.78 199691.17$329.89$282.2028%32%$2.46$6.84 199794.89$321.49$272.3230%35%$2.37$6.37 199897.04$287.29$254.9334%38%$1.77$5.15 199995.61$269.76$228.6835%42%$1.73$5.10 200098.31$267.31$237.5637%41%$1.75$5.11 200197.89$228.38$208.5243%47%$1.75$5.15 2002101.57$344.09$258.5230%39%$2.18$5.31 2003103.74$358.05$246.8129%42%$2.23$6.85 2004105.90$351.40$228.3030%46%$2.00$5.45 2005110.40$375.47$300.1029%37%$2.03$5.65 2006114.83$511.27$316.0522%36%$2.90$6.05 2007125.44$611.21$472.7621%27%$3.68$9.52 2008146.55$681.06$432.3222%34%$3.89$9.65 2009158.86$716.55$474.3222%33%$3.74$9.66 2010168.25$884.41$564.0219%30%$4.68$10.87 2011169.32$929.62$493.0418%34%$5.66$11.40 Average28.11%36.72%

38. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Flexible Rents based on gross revenue: This is a rental agreement where rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined. Base rents plus a bonus: This is a rental agreement where a base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal. Then these additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together or price alone as well. Flexible rent based on yield only : This is a rental agreement where the landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment. This can also be done with a cash payment based on yield and then price at an elevator. Flexible rent based on price only: This is a rental agreement where the rental payment is based on crop prices. Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the bushels agreed to. Rental payments can be made at the quarterly price setting times or half and half or after harvest. Profit sharing flexible rent agreements: This is a rental agreement where the landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop share lease where they share crop yields 50% to landlord and 50% to the tenant and some of the expenses are paid by each party.

39. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Calendar Year CornSoybeans 2011$6.62$12.83 2010$3.84$10.01 2009$3.40$9.89 2008$4.92$11.59 2007$3.38$7.78 2006$2.15$5.39 2005$1.68$5.80 2004$2.32$7.53 2003$2.10$6.07 Average$2.38$6.27 Worthington Yearly Average Cash Prices

40. 2013 Corn Using 67% of Net Income before Rent & Labor Copyright © 2011-12. University of Minnesota. All Rights Reserved. Cash Price170175180185190200 $ 5.00$190$206$223$240$257$290 $ 5.50$247$265$283$302$320$357 $ 6.00$304$324$344$364$384$424 $ 6.50$360$382$404$426$448$491 $ 7.00$417$441$464$488$511$558 Assumes corn input costs of $567 per acre

41. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Cash Price404346495255 $ 10.50$102$123$144$165$186$207 $ 11.50$129$152$175$198$221$244 $ 12.50$155$181$206$231$256$281 $ 13.50$182$209$237$264$291$318 $ 14.50$209$238$267$296$326$355 2013 Soybean Using 67% of Net Income before Rent & Labor Assumes soybean input costs of $268 per acre

42. Copyright @ 2012-13 University of Minnesota All Rights Reserved. 40,17042,17544,18046,18548,19050,200 $146$165$184$203$221$249 $188$208$229$250$271$301 $229$252$275$297$320$353 $271$296$320$345$369$405 $313$340$366$392$418$456 2013 Corn and Soybean Average Using 67% of Net Income before Rent & Labor Soybean and Corn Yields

43. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Rental Lease Examples

44. Copyright @ 2012-13 University of Minnesota All Rights Reserved. CornSoybeans EstimateYour FarmEstimateYour Farm Yield Bushel/Acre180________ 48________ Price $/Bushel$ 5.50$________$ 12.50$ ________ Gross $/Acre$ 990$________$ 600$ ________ USDA Transition Payment$ 0$________$ 0$ ________ Total Counter-cyclical Payment$ 0$________$ 0$ ________ Total Income Per Acre$ 990$________$ 600$ ________ Seed$ 110$________$ 55$ ________ Fertilizer$ 180$________$ 25$ ________ Herbicide/Insecticide$ 28$________$ 30$ ________ Crop Insurance$ 25$________$ 25$ ________ Drying Fuel$ 25$________ Fuel/Oil$ 37$________$ 24$ ________ Machinery Repairs$ 49$________$ 32$ ________ Machine Leases/Machine hire$ 10$________$ 8$ ________ Interest on Operating$ 12$________$ 8$ ________ Overhead Expenses Operator Labor$ 70$________$ 70$ ________ Hired Labor$ 25$________$ 17$ ________ Depreciation on Machinery$ 51$________$ 34$ ________ Other Expenses$ 41$________$ 35$ ________ Total Expenses per Acre$ 663$________$ 363$ ________ Net Return to Land or the $ 327$________$ 237$ ________ Amount Available to Rent Ave:$282 2013 Crop Budgets for Southwest Minnesota Prepared by David Bau, Regional Extension Educator, Ag Business Management August 2012

45. Copyright @ 2012-13 University of Minnesota All Rights Reserved. What is a Fair Rental Agreement?

46. Copyright @ 2012-13 University of Minnesota All Rights Reserved. $90 $120 $150 $180 $210 $240 $270 $300 $330 $360 $390 $420 $450 $480 $510 What is a fair rental rate?

47. Copyright @ 2012-13 University of Minnesota All Rights Reserved. In a fair and profitable rental agreement the farmer makes a profit and the landlord receives a fair rental payment.

48. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Initially: Base Rent with a flexible component, farmer makes a profit and the landlord receives a fair rental payment. Then: Devise an agreement where share extra based on yield, price, gross, net. You decide what works for both parties

49. Copyright @ 2012-13 University of Minnesota All Rights Reserved.

50. Over 1200 people attend workshops Roughly 1/3 farmer and 2/3 landlords Rated workshop 4.22 on 1-5 scale. Farmers averaged 793 acres Landlords 177 acres Group Total 387,226 acres This accounts for over 2.5% of corn and beans planted in Minnesota in 2011. Attendees stated average value of workshop $139 for total of $158,738

51. Copyright @ 2012-13 University of Minnesota All Rights Reserved. Questions?? David Bau Regional Extension Educator Agricultural Business Management University of Minnesota Extension bauxx003@umn.edu