The driving factor continues to be high grain prices.  Worldwide demand for US grains appears to be strong through at least the next 12-18 months, which should keep prices strong.  However, many farmers are going to be hit with higher input costs in 2012, mainly fuel and fertilizer.  As we saw in 2007 and 2008, the margins at $7 corn are sometimes no greater for producers than they are at $3.50 corn.

How will this affect the land market?  At most sales, farmers have been an integral component on driving sales.  While we have seen a strong demand from individual and institutional investors, it is typically the local farmer base that is one one of the biggest groups bidding on the land.  As rents and other input costs go up, their available disposable income will decrease, giving them less cash on hand to attempt to buy farmland.

If you think that you might sell your farm between now and spring planting, or if you want to update the terms in your lease, it is imperative that you correctly terminate your existing agreement.  Why?  In the case of a farm sale, terminating the lease ensures that all potential buyers, especially neighboring farmers, will be interested bidders.  Because of higher grain prices, farmers and investors have been more aggressive in bidding for land the past few months.  And they want to actually farm the land they buy — they don’t want to be a landlord for another farmer.  If there is a lease in place on a property, they will either discount their price or have no interest at all.  This could ultimately lower the sale price by 10 – 15%.  In the case of a desire to modify your current lease, if you do not terminate the existing agreement, then your tenant is under no obligation to agree to a change in terms for next year.  Once again, the financial damage could be significant if you are constrained by an existing lease where the income to the landlord is significantly below the market.

The mechanics of properly terminating a lease vary from state to state.  Generally, the notice does have to be in writing and must contain specific language.  These guidelines need to be followed carefully, regardless of whether your current agreement is written or oral.  The following table provides an overview of the important facts to know in order to properly terminate a lease in selected states.  If you have additional questions, we suggest that you contact your attorney.  

(1.) When notice must be sent prior/relative to expiration date of lease.  Note that the expiration date of a lease can vary.  Historically, the lease period ended on February 28^th. However, many modern leases expire on December 31^st. Make sure you know this date in order to forward the notice in time.

So what did we learn in the May issue?  As expected, farmland values increased in the first quarter of 2010, with the “I” states (Indiana, Illinois, Iowa) leading the way.  In addition, values in these areas were up from 4 – 8% over the same period last year.  Interest rates for farm loans in the first quarter of this year were lower than anytime during the past 24 months.  And finally, the letter also had some interesting articles that discussed the Price-to-Earnings ratio for farmland, loan repayment rates, and the outlook for land prices for the second quarter (85% thought that they would remain unchanged).

 If you’re truly interested in following agricultural trends in the Corn Belt, I would suggest subscribing to this publication (or continue reading our blog in the future!).  It’s one government report that I find both interesting and informative.

The volatility we’ve seen in the grain markets the past 3 years is creating the need for another type of lease – the flex lease.  This lease type is not new – there have been variations of it around for several years.  Essentially the flex lease tries to incorporate the aspect of the cash lease that landlords found appealing (no expense checks to write and a guaranteed payment amount) with the revenue sharing aspect of the crop share lease (when grain prices go up or when yields are exceptional, the rent can go up).  All this is accomplished by setting a floor rent that the farmer is willing to pay for the land, and then incorporating a formula that calculates a bonus based upon crop prices, actual yields, or both.  Sometimes the formula is simple, and sometimes it’s quite complex.  A recent article (Creating A Flexible Farm Cash Rent Lease) written by two Kansas State University Agricultural professors details the process that many farmers and investors are going through to try and establish an agreement that is fair, given the changing conditions in farming.

I’m confident that in the not too distant future we will see leases for farmland properties evolving again.  If you have any thoughts regarding this issue, please email them to loranda@loranda.com

• Illinois – 3.7 % decrease to an average value of $4,670/A
• Iowa – 4.9% decrease to an average value of $4,050/A
• Indiana – 4.6% decrease to an average value of $3,950/A

Across the U.S., cropland cash rents rose at average rate of 5.3%.  Some state-specific cash rent statistics:

• Illinois – 4.3% increase to $170/A
• Iowa – 5.9% increase to $180/A
• Indiana – 4.4% increase to $141/A

Download the full report, here.

Source: USDA