Negotiating a Fair Rental Contract

A Q&A with David Bau and Nathan Hulinsky

How do you define “fair” when it comes to rental contracts?

DB: Fair means both farmer and landlord share the risks and rewards. A flexible contract gives the best option for both parties with the farmer having crop insurance and the landlord having a base or minimum rent.

NH: The marketplace helps determine what is fair in the given year and the given area. As a farmer or rancher, knowing your cost of production is key. Ask yourself, what can I afford to spend on rent?

Each farmer is different. Knowing your local numbers is important. Keep in mind the trends in your county or surrounding counties.

What does a fair rental contract look like?

DB: A fair contract shares the risks and rewards between the farmer and landlord. A base rent covered by crop insurance and a flexible agreement works best.

NH: The negotiated price is set when the farmer is comfortable with paying a certain amount and the landowner is comfortable taking the same amount. Factors to keep in mind are the length of the contract. Is it one, two, three, or more years? The first right of refusal is common to include in a contract. Also, the location of the land is important as well. Is the field right down the road, or is it 20 miles away? Proximity matters.

Where should people begin?

NH: You should start the negotiation process with your goals in mind. As a farmer, what is the most you can afford to pay for rent on a parcel? For the landowner, what is the lowest you are willing to rent a parcel for? Also, knowing your local rental rate trends is very helpful. However, we keep coming back to knowing your cost of production. This is critical to your success as a farmer.

What questions should be asked as part of the process?

NH: What prices do you find acceptable? How many years is the lease? How many acres? Does the landowner have any mandates for renting the land, crop type, tillage system, or anything else? Does the landowner want a crop share or other involvement with the farming business? Are there any fertilizer considerations?

Is there a difference when negotiating farmland vs pastureland?

NH: Data on pastureland is less available. The biggest difference is that in pastureland there are considerations for how many animals per acre, water source, and other feed. Who is maintaining the fences? The animal units per acre is a big difference. On cropland, a farmer simply rents acres and plants a crop. With pastureland, it is common to pay per animal and not per acre.

What questions do you commonly get asked about this subject?

NH: The biggest question is what average land rental rates are in a farmer’s local county. We have resources on our website to help. We will note that the website does not project for 2024, though. Other key questions include tile and irrigation. A farmer can install tile on rented ground, but the farmer would want a long-term contract to help them utilize the tile for years to come. If the landowner pays for the tile, they will want a higher land rental rate. A similar logic applies to irrigation. These are not easy questions and can complicate negotiations.

What are some of your best tips for people when negotiating?

DB: Try to have an open conversation about the profit potential and how much you are sharing with the landlord.

NH: Know your cost of production and your county land rental rate trends. Do not start the discussion unprepared. Have a maximum or minimum number that you are willing to accept and stick to it.

We’re seeing more and more landowners removed from agriculture. Does this make negotiating more challenging when the landowner doesn’t or hasn’t farmed?

DB: Yes, it does. As farmland gets passed to a different generation or leaves the family, these nonfarming heirs or owners want the highest rent possible in many cases.

What advice do you have for negotiating with non-farming landowners?

DB: Have examples of income and expenses without rent and show the net funds available for you. NH: It is helpful to show trends in local and regional land rents. The farmer can help educate the landowner. This may, however, cause a problem because of a conflict of interest. I encourage all to attend a University of Minnesota Extension Land Rent workshop. Also, explain the cyclical nature of the agricultural economy, including how corn and soybean prices go up and down and affect a farmer’s income. It can be helpful to explain how you will care for the land and have a vested interest in applying fertilizer and other inputs. Also, stating your intentions to farm this field for multiple years.

If you’re a young or beginning farmer, are there any other considerations?

DB: To get new ground, you are often bidding against other aggressive producers. This means you will have a harder time competing. A good way to get your start is by looking for local farmers who are approaching retirement age with no farming heirs.

NH: Do not pay more for land rent than you can afford to. Losing money on renting 40 acres does not help your operation. Know your cost of production. There are some tax incentives through the state of Minnesota for landowners to rent to beginning farmers.

Where can farmers and ranchers go to get more resources?

DB: The University of Minnesota Extension has great resources on land rental data extension.umn. edu/business/farmland-rentand-economics

Is there anything else that people should know?

NH: Do not be afraid to ask questions throughout the process. If you need more resources, please contact the University of Minnesota Extension.

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