NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

March 4, 1999

NDSU Ag Economists Encourage Land-Rent Negotiations

There will be instances this spring where it is in a landlord's best interest to reduce rents on farm land if it helps to keep a renter in business, say two agricultural economists at North Dakota State University. These negotiations are most likely to occur in areas where producers have suffered successive years of balance sheet deterioration and where farmers are getting out of business at greater-than-normal rates.

"In these areas of the state, the outcome of whether producers are willing and able to farm in 1999 will affect landlords more than in the past when there was a line of suitors waiting to vie for available land," says Andy Swenson, farm and family resource management specialist with the NDSU Extension Service.

In some locations, there are fewer full-time farmers competing for land, and many are less apt to take on the risk of additional acreage. Swenson says some landowners who rent out crop land may be put at risk if a renter decides not to farm this spring—especially if the land is of poor quality or has rocky, irregular fields, poor drainage or poor access.

"It may be difficult to find someone to farm the land, and in extreme cases, it may lie idle," Swenson says.

In recent years a significant amount of effort has been expended in trying to move producers from being price takers to price negotiators. The theory holds true on the input side, says Dwight Aakre, extension farm management specialist at NDSU.

"Producers need to put more effort into negotiating the price or cost of inputs," Aakre stresses. "For most producers, land is the largest expense item in crop production. Any meaningful reduction in the cost of production must begin with the big-ticket items."

Current conditions in agriculture do not support the continuous rise in land rents that has been occurring, Aakre says. Farm operators need to look at every rented tract individually and determine the maximum amount of rent they can afford to pay. This process should be based on a complete rotation unless the rental arrangement is for only one year.

To perform these tract-by-tract analyses, renters first need to estimate how much income the land is likely to generate. Aakre says this estimate should be based on the average yield times the expected price for each enterprise. Add to that figure the average government payment per acre, and the total represents the gross income per acre for each crop.

From gross income per acre, subtract the variable costs per acre for each enterprise. This leaves return over variable costs, which is the amount available to pay all overhead (fixed costs), Aakre explains. The fixed costs that must be subtracted include machinery depreciation and interest, general farm overhead, labor and management.

After subtracting these fixed costs from return over variable costs, the remainder is the maximum a producer can afford for land rent. Paying more than this for rent means income must be greater than a producer projects, in the form of higher yields and/or higher prices, Aakre says. Since general farm overhead is a cash cost and labor and management is likely used for family living—also a cash cost—the shortfall inevitably comes of out machinery replacement.

Aakre concludes, "It is time producers begin exercising control over their business rather than always accepting what is offered. That means walking away from a deal that won't pencil out. Not farming the land may be a better option."

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Sources: Andy Swenson (701) 231-7379 and Dwight Aakre (701) 231-7378

Editor: Dean Hulse (701) 231-6136