Auctions raise rents on land values

Feb 10, 2012
by DTN
Auctions raise rents on land values

Nearly 300 people crammed into a motel meeting room to attend the first cash rent public auction in the Mason City, IA, area Saturday, Feb. 4. About 25 active bidders raised hands or nodded heads as two-year leases for more than 2,250 tillable corn/soybean acres in 14 tracts went up for grabs. After the final “going once, twice, sold,” the tillable-acre winning bids ranged from a low of $325 for 78 acres (62 tillable, subject to flooding) to $520 for 108 acres (all tillable).

Most of the winning bids ranged from $425 an acre to $490 per tillable acre, rates that left onlookers somewhat stunned. After all, farmers in Iowa’s most expensive cash rent county only paid an average of $235 an acre in 2011, according to USDA. The excessive rent also means growers will be shouldering sizable risk should commodity prices plunge to more normal levels between now and 2014 and probably dictates that corn will be the crop of choice to pay the bills on that land.

The Mason City event was the fourth cash land lease auction in three days for the owners, Charles E. Lakin Enterprises out of Omaha, a family business enterprise that had expiring leases on 3,336 tillable acres in Iowa. The Lakins’ farms are scattered over eight counties in western, central and north-central Iowa.

“We weren’t sure what the cash rent market was and we didn’t know how to set a fair price, so we thought we’d try an auction,” said Chuck Lakin, son of Charles E. Lakin. “It worked out pretty well.”

Farmland tenants generally dislike public lease auctions for two reasons: 1) They remove the traditional, personal relationship bond between the owner/tenant and reduce it to a numbers game; and 2) It publicizes actual cash rents so all the landlords in the area can compare how their leases stack up. Even if you are the highest bidder and get the ground, you may not want your other landlords to know you are willing to pay that much for land. In fact, one of the current tenants (who won the highest bid on ground he had been farming) had a proxy at the Lakin farm lease auction and came in after the auction to sign the papers and write the check.

For the landowner, an auction “takes away the stress from negotiating with the tenant and gives the land the potential to reach its fair market value,” said Allan Hughes, who conducted the Lakins’ lease auction.

“These leases are structured so good husbandry is required,” explained Hughes. A five-page lease requires the tenant to keep the ditches free and clear and to provide soil tests, fertility input records, yield information on each farm.

Winning lease holders locked in a two-year lease for the 2012 and 2013 crop year. Twenty-five percent of the 2012 payment was due within an hour after the auction and 75 percent will be due March 1, 2012. Next year, a quarter of the rent must be paid by Jan. 15 and the rest on March 1, 2013.

Bidders ranged from a father with his 20-something son toting his Mountain Dew to gray-haired, 60-year-oldplus farmers sipping Folgers regular roast from a Styrofoam cup. Hughes, located in Glenwood, IA, has conducted several cash lease auctions each year since 2009. “The commodity market is the driving force [behind lease auctions]. Commodity prices are at levels we’ve never seen before. It’s pretty stressful for a landowner to negotiate rents. He doesn’t want to be unfair to the tenant but he’s not sure what to charge. An auction doesn’t necessarily take the land away from the current tenant; it gives everyone a chance to bid in an open market,” Hughes added.

In November 2011, Hughes auctioned cash leases on a 160-acre tract and a 240-acre piece in the hills of western Iowa’s Mills County for $465 and $480 per acre. He tagged those parcels onto a land auction for 420 acres in Adams County that sold for $5,500 an acre.

Besides public auction, other farmland experts are helping landowners find a “fair” price. “We’ve converted a lot of cash leases to flex leases in the past couple years as commodity prices have soared,” said Mark Gannon of Ames, IA.

Gannon also offers lease appraisals for around $400. “Sometimes the owner wants to keep the same tenant. Realizing every farm is different, the landlord wants an outside, informed opinion on what is fair for the farm. Some owners have fiduciary duties for other members of their family and they want to get a fair cash rent,” Gannon explained. “You can’t always go by CSR (corn suitability rating) to determine the land’s productivity. I can point to two Story County, IA, farms across the road from each other. One has a CSR of 70 and yielded 208 bpa. The other has a CSR of 85 and only yielded 143 bpa. Fertility, drainage, operator management and weather can have a bigger influence on yields.”

The sealed cash lease bids are confidential and the owners can look at the resumes of the all the bidders and decide which operator to choose, even if he’s not the highest bidder.

“At the end of the day, we’re trying to find what’s fair for both the operator and the landowner,” said Hughes. — Elizabeth Williams, DTN