Our Thanks to You, Our Lessees

The Washington State Department of Natural Resources (DNR) would like to express a warm thank you to all the individuals and entities who lease State agricultural lands from the department. Our contractual relationships survive and endure the term of our leases and beyond in many cases.

As each lease approaches its expiration we are required to make a decision: shall we continue leasing with the existing lessee through a process called “Negotiation,” or would the trust benefit more by allowing the lease to go to public auction, where any qualified bidder would have an opportunity to obtain the lease from DNR.

As the agricultural economy remains resilient, more individuals and entities are expressing an interest in leasing State agricultural trust lands. In response, DNR is looking at putting more leases up for public auction. These leases would include irrigated lands, dryland crop lands, and grazing lands. Recently, we’ve held successful auctions in all of these categories, generating additional revenues through bonus bids and higher rates per acre than historically thought possible.

To help meet the demand for more information about leasing State agricultural lands, DNR has rolled out a new email service for those who want to learn about the State land leases coming up for public auction. We envision that this service will enable DNR to more efficiently notify more people about upcoming public auctions. In June, we sent our first email to a large group individuals and entities who had previously expressed interest in being notified of these upcoming opportunities. If you received one of these emails but do not want to receive future e-mails, our email system makes it easy to opt out of future notifications. If you are interested in state trust land leasing opportunities but did not receive this notification in June, or you want to change your email address or other contact information in our database, simply click this link and follow the sign-up instructions.

Again, thank you for choosing to do business with the Washington State Department of Natural Resources.

By Chad Unland, DNR Natural Resource Specialist, Southeast Region, chad.unland@dnr.wa.gov

New Zealand: Island Nation is International Agricultural Powerhouse

Dairy cattle in New Zealand

Dairy cattle numbers in New Zealand have more than doubled in the past 25 years — from 3 million in 1989 to 6.7 million in 2014. Photo: Cindy Preston/DNR.

This last February I accompanied 13 other Washington Agriculture and Forestry (Ag.Forestry) Leadership Program alumni and their spouses on a visit to New Zealand. Our 15-day tour began on the North Island then proceeded to the South Island with a mixture of agriculture and forestry stops and some fun side trips.

In Auckland our group had the opportunity to meet with James Donegan, the US Consul General; Michael Hearn, executive director of the American Chamber of Commerce New Zealand; and Anna Jackson, senior policy analyst for the Ministry for Primary Industries.

New Zealand is a small island nation of about 4.4 million people, 65,000 farms & orchards. It is relatively pest and disease free with climate conditions consisting of abundant rain and sunshine with mild to warm temperatures. Grass grows all year round in most areas and livestock are grazed in large paddocks.

Land use in New ZealandWith 11.8 percent of the population employed in agriculture and forestry, 85 percent of New Zealand agricultural produce is exported, an amount that represents 66 percent of all merchandise that the nation exports. New Zealand is the world’s 12th largest agricultural exporter (by value), number one exporter of sheep meat and dairy products (mostly dried milk), and the number two wool exporter.

Dry conditions in the northern portions of the North Island and continued land use changes in the South Island have caused New Zealand’s sheep numbers to decrease by 3.2 percent (a decline of 1.2 million sheep) over the 2013-14 season. In the same period both beef and deer numbers fell while dairy numbers increased.

sheep in New Zealand

There are approximately 29.4 million sheep in New Zealand. Most are dual-purpose crosses raised for wool and meat.

There are approximately 29.4 million sheep in New Zealand. Some straight Merino are still run in the high country but the majority of sheep now are dual-purpose crosses raised for wool and meat. They are generally Romney-Texel crosses with a few Suffolk or Hampshire.

New Zealand dairy production has risen from 3 million dairy cattle in 1989 to 6.7 million (5.26 million in calf or milk) in 2014. New Zealand is now cow rich and sheep poor. Many sheep stations and timber lands have been converted to dairy pastures.

While some cows look straight Holstein very few are – the local stock is mix of Brown Swiss, Jersey or Guernsey with the Holsteins for smaller cows. Cows graze out in the paddocks except when milked twice a day. Dairy farmers take a 3-month break from milking since cows are only milked nine months of the year. The majority of milk is exported as powdered milk to Asia.

Some other facts about agriculture in New Zealand are:

  • Beef cattle are mostly Angus or Herford -Angus cross.
  • Just under 1 million elk and red deer are raised in paddocks right alongside of beef and dairy cows and sheep.
  • Cattle, sheep, elk and deer are mostly grass-fed but may be supplemented with some haylage. Barley, maize, wheat and peas are also grown in the arable farming areas.
  • Horticulture: An estimated at 306,410 acres. Kiwifruit (30,072 acres) and wine grapes (82,587 acres and growing) are the larger crops. Kiwifruit is branded and marketed cooperatively.
  • Vineyards in the Auckland area tend to be smaller with the larger vineyards covering hundreds or even thousands of acres are to be found on the South Island.
Ag Forestry visitors

More than a dozen Ag Forestry Program alumni visited New Zealand with their spouses recently.

While in New Zealand our group traveled by plane, bus, barge, van, ferry, train and, eve by grain truck. We had a wonderful trip and it is a very beautiful county that has a lot of similarities to Washington. I would recommend visiting New Zealand, but be ready for the long flight.

By Cindy Preston, DNR Agriculture Lease Specialist.

New Conservation Tool: USDA-NRCS Conservation Client Gateway

NRCS logo This spring the USDA Natural Resources Conservation Service introduced an online tool for requesting technical and financial assistance.

Anyone who is familiar with the USDA-NRCS might be interested in a new online portal the agency recently rolled out. Termed the “Conservation Client Gateway,” the tool is available to individual landowners and will be available to businesses in the near future. The tool offers you the ability to request USDA-NRCS technical assistance; apply for conservation program financial assistance at the click of a button; view, sign, and submit documents online; track the status of your requests, and track your payments.

Check out the Conservation Client Gateway on the Natural Resources Conservation Service website.

Fair Market Rents and Trust Land Management

PotatoesandOrchard

Rows of potatoes are seen in front of orchard leases on state trust lands.

As trust managers with a fiduciary responsibility, Department of Natural Resources (DNR) leasing staff have an obligation to keep lands productive and generate revenue for the trusts. By law, we strive to obtain Fair Market Rent (FMR) for lease of state trust lands.

Just what is Fair Market Rent (FMR)?

Fair Market Rent is a value based on both parties (lessor and lessee) having reasonable knowledge of the facts of the lease and land, and the price not being affected by stimulus or stress. In their book State Trust Lands: History, Management, and Sustainable Use (University Press of Kansas, 1996), Jon A. Souder and Sally K. Fairfax note, “… fair market value represents the amount for which the lease would change hands between a willing, knowledgeable buyer and a similarly situated seller on the open market.”

Actual rents may be influenced by a number of factors, but looking at three criterion for fair market value rents described by Souder and Fairfax may help folks to understand DNR’s decisions as fiduciary managers:

  1. Is either party (lessee or lessor) “under any compulsion to” offer or acquire the lease?
  2. Is the land being leased for the ‘highest and best use’?
  3. Is the lease being offered on the open market?

Is either party (lessor or lessee) “under any compulsion to” offer or acquire a lease?

It is understood that rent may differ from a fair market rental value when one of the parties is under stimulus or stress that affects the price paid. An example (beneficial to the trusts) is when a lessee is willing to pay over FMR or a pay a large bonus bid to acquire a lease to expand into a new area, or acquire more lands to gain an economy of scale.

Other times, a party may not be compelled to acquire a lease or pay FMR. In the case of state trust lands, the dispersed nature of the parcels acquired from the federal government and their attributes may limit the state from gaining full market value. For example, a small, remote parcel with no legal access may not command the rents of one without these limiting factors.

When possible, DNR land managers pursue options to remove these barriers to acquiring FMR. We can improve potential for leases to command FMR when we acquire legal access to ‘landlocked’ parcels, enforce removal or payment for unauthorized uses, or when we encourage lessee investment in infrastructure that benefits the current or future land uses (adding fencing on grazing leases, or providing irrigation systems on an irrigated agriculture lease). Trading properties to block up lands, and disposing of hard to manage parcels are other options to create an asset base with fewer limiting factors. Funds from the sale of disposed parcels can go to purchase replacement properties with greater revenue potential.

Is the land being leased for the highest and best use?

One of our mandates is to assure lands are put to their ‘highest and best use,’ and when managing lands in perpetuity, this means the use with greatest potential for revenue production to be sustained over time.

In agricultural leasing, protection of soil resources is a big part of keeping lands productive. Resource management requirements assure that our leases are as productive as they can be today, while assuring that the land uses of today don’t impact the productivity of the land for future generations of trust recipients.

For example, we evaluate dryland leases when a Conservation Reserve Program (CRP) contract expires. The soils, location, or topography of the land may lead us to conclude CRP is the best and most sustainable revenue generating use.

Other times, CRP might have been the best option when the lands were enrolled, but dryland farming may now be economically and environmentally feasible.

Direct seed tillage methods have come a long way, and if the lands can now be farmed with minimal soil disturbance and soil loss, and when potential yields and prices are high enough, the return from dryland crop rents may be greater than CRP rents.

DNR also significantly increased numbers of acres farmed and rent per acre when we authorized changes in use from higher water duty crops to those with lower water requirements, which command equal or higher rents. For example, if DNR authorizes a land use change from irrigated row crops to vineyard, additional acres may then be developed with the saved water. While there are costs associated with providing infrastructure to develop new parcels, these investments provide lasting benefits to the trusts. Souder and Fairfax credited large increases in value of both Washington’s trust lands and trust revenues to DNR’s leasing program’s strategically planned investment in infrastructure on agricultural lands. They noted, “Money – in combination with sufficient staff – allowed the WDNR to increase the value of its trust lands.”

Is the lease being offered on the open market?

Widely marketing leases serves a number of purposes in assuring fair market rental values. It allows more parties to learn about and potentially bid on leases, either at re-lease, or when leases are offered through public auction. Increased competition can motivate bidders to place bonus bids in addition to rent, further increasing revenue to the trusts.

Widely marketing leases also allows trust land managers to verify that rents being charged are FMR for a given rental type.* (*State leases are generally triple-net, that is, the lessee pays all operating expenses, taxes, and insurance associated with their use of the land.)

For example, we may hear that lack of water is a limiting factor on a given lease, but if we widely market the lease when it is offered at public auction, and receive bonus bids from multiple bidders, this may indicate that lessees are willing to make needed investments to acquire the lease.

Conversely, if a lease is offered and no bids are placed, we can learn through potential bidders what factors may make a future lease more attractive. Bidder feedback may result in the lease being re-offered with a different rental structure, or a different size through splitting or combining leases, or finding ways to allow the state or lessee to invest in needed infrastructure, when doing so adds value to the parcel.

FMR values also depend on all parties having knowledge of facts about the lease and land. DNR land managers are working to make more pertinent information available earlier to potential bidders and lessees.

By removing limiting factors to achieving FMR, assuring land is leased for the highest and best use, and widely marketing leases DNR land managers meet their fiduciary responsibility to keep trust lands productive, and generate revenue for the trusts, in perpetuity.

By Kathleen Beach, DNR Lease Marketing Manager