For nonfarming heirs who keep land in the family, managers can be an answer

Dave Butler doesn't have a clue how to farm, and he has never lived on a farm. But his parents and grandparents owned a large farm west of Hutchinson, and Butler and his brothers inherited 440 acres after their mother died in 2010.

The brothers decided to keep the acreage in the family.

"It's just a good investment," said Butler, 62. "They don't make dirt anymore, you know, and we want to keep it for the family heritage and investment income. I go out there quite a bit and check on it."

How to make that investment income can be tricky. Butler and his brothers didn't know what was an appropriate rental rate for the land or how to evaluate whether tenants were taking care of it properly. For that, they rely on U.S. Bank.

Butler's family is one of about 31,000 land owners renting out cropland in Minnesota to the tune of nearly $2 billion annually, according to federal estimates.

And as the average age of farmers inches toward 60 and more cropland passes to nonfarming younger generations, as in the case of the Butlers, the business of managing many of those farms is on the rise to help with rental agreements, taxes and other financial and land management decisions.

A 2014 survey by the U.S. Department of Agriculture estimated that more than 2 million acres of Minnesota farmland, most of it used to grow crops, is expected to be transferred during the next five years. And with the graying of farmers, it's likely that even more ownership changes will occur during the next two decades.

Butler looked over the property 80 miles west of Minneapolis last week with Jim Myhra, a senior vice president in farm and ranch management for U.S. Bank. Myhra said the land in Renville County is some of the best in the state, with deep topsoil, rich organic content and good structure that produces high corn and soybean yields year after year.

"They've got a farm with good natural slope," he said, sweeping his arm in the direction of a 160-acre section with foot-high corn. "It's got good natural drainage, and they've incorporated [drainage] tile throughout the years."

Myhra has been a farm manager for 27 years, and has worked with the Butler family for the past 15 years.

Their property is one of about 1,000 farms the bank manages that stretch across the country from Ohio to Washington state. The bank also offers other services related to land, including setting up trusts, wills and sales, Myhra said, but many owners simply want to keep the land, and ensure that its fertility and value are maintained.

"Farmland is an asset that has a lot of value," said David Widmar, an ag economist at Purdue University. "It can be degraded if it's not managed properly, the nutrients can be mined without replenishing the fertilizer, and bad practices can lead to erosion, weed pressure increasing and other problems."

Farm managers can play a significant role in protecting the land and its value, and function as agents or intermediaries for the farmers or investors that hire them. At a minimum, managers identify and select renters and negotiate cropland leases.

For the Butler family, Myhra also collects the rent, pays taxes and insurance, signs up for government farm programs and consults with the family about drainage, conservation or other land improvements. He also supervises the amounts and types of seed, fertilizer and herbicides that renting farmers use on the land, visits the farm to test the soil and make sure the lease provisions are being followed, and reports to the family about crop progress, yields, prices and domestic and international markets.

For their work, managers charge fees that vary considerably, depending on the range of services provided, size of the farm and other factors. Often the fee is between 5 and 10 percent of the annual rent, which would be $21 an acre if the fee was 7 percent and the land rent was $300 per acre. Fees may also be a share of the net proceeds from crop sales, or may be customized in various ways, depending how the farm manager and landowner set it up with tenants.

"We don't just go out and rent a farm," said Ed Cowling, director of the specialty asset management group at U.S. Bank's wealth unit. "Our folks go out and look at the soil and work with owners and tenants to make a good business plan. We don't try to get more than the farm is worth, which might force the farmer to cut fertilizer and deplete the land."

Ward Nefstead said that people often hear about farm managers by word of mouth, and some have worked with the same families for generations. Nefstead is secretary and education coordinator of the Minnesota chapter of the American Society of Farm Managers and Rural Appraisers, which teaches courses and accredits its members.

Nefstead said there are about 30 farm managers in Minnesota, all of whom are required by state law to have real estate licenses. A few are independents, he said, but most work for banks or farm real estate companies.

"A lot of firms are hiring new people," he said. "That's because more people are inheriting property, or investors are buying it."

Demographics a big factor

Driving those changes are farming demographics. One-third of all producers are over the age of 65, according to USDA's 2012 Census of Agriculture.

"We've never seen that historically," said Widmar. The age distribution nationally in farm ownership — which now has two farmers over age 65 for every one farmer under age 45 — will likely fuel the trend toward fewer farmers and larger farms in the future, he said.

To be sure, much of the 11.6 million acres of cropland rented in Minnesota is farmed by relatives or acquaintances who know the landlord, and the transaction may be no more complicated than agreeing to an annual rental price per acre over a handshake.

"Many farmers retire and their biggest source of income in retirement is land rent," said Kevin Klair, Extension economist at the University of Minnesota. Many of those producers know the land and don't want to pay anyone to manage it for them.

"If they have fairly close relationships, they don't need a manager because they enjoy staying involved or they don't want to release control to someone else," said Randy Sook, president of Northwestern Farm Management Company in Marshall and a farm manager for the past 30 years.

Sook said one of the less appreciated advantages of paying to have a farm managed, in addition to peace of mind, is receiving expert advice about protecting the land and keeping up with changing rules, such as Minnesota's new buffer strip law near ditches and streams. Analyzing the land's potential to increase yields might mean looking at installing terracing or tile drainage, he said, or even taking some land out of production and enrolling it in conservation programs.

Myhra said it's one thing for a farmer to rent out cropland for retirement income, but things can change quickly when the land is passed on to the next generation. Families that inherit land sometimes have different goals for the property, he said, such as maximizing production or devoting some acres to conservation. Or siblings may quarrel about who should manage the money, or how much rent to charge.

In those situations, Myhra said, emotions can run high and families either give up and sell the land, or look for a trustworthy third party that can satisfy everyone's needs and keep the farm in the family.

"As all this land transitions, you're going to see the kids step into the driver's seat," Myhra said. "There's going to be greater expectations for that land than maybe ma or pa had during their retirement time frame."

Tom Meersman • 612-673-7388