Cash Rents Holding Up

Low commodity prices haven't put much of a dent in land leases, but there are options to think about.

Steady land values are propping up equity in farm country, but they’re also making it tougher for farmers to negotiate lower rents in 2019, Image by Elaine Shein

Agricultural land values are holding steady despite tumbling commodity prices. On the one hand, that’s good, because those land prices are propping up equity in farm country, providing much-needed collateral for operating loans. Unfortunately, it’s not so good when it comes time to negotiate next year’s cash rents. Landowners tend to think if property values are holding, they should toe the line on rents, too.

“In this environment, that’s an unrealistic expectation,” says Leslie Miller, vice president of Iowa State Savings Bank, in Knoxville, Iowa. “Farm operators cannot afford to lose money by paying the same rents as last year.”

Miller says she met with one south-central Iowa landowner who received $225-per-acre cash rent in 2018. After running the numbers for 2019, Miller showed him that his tenant would have to grow 205-bushel-per-acre corn to be able to pay the rent.

“The landowner admitted his ground was not that good,” Miller notes. With yields averaging 175 bushels per acre, Miller suggested $180 per acre would be more realistic. The landowner said he’d be willing to do that if the total rent was paid up front.

While this meant the operator would have to pay six months interest on half of the rent normally paid in November, the reduction in rent made it a feasible proposition. “Landowners should be willing to negotiate,” Miller stresses.

Justin Dammann grows corn and soybeans, and raises cattle in Essex, Iowa. He says unyielding cash rents are complicating cash-flow projections for 2019.

“You can be $80 to $100 per acre away from making money,” he says. “We aren’t just talking a $15-per-acre reduction. We need a $30-, $40-, $50-per-acre decrease. That equates to a 15 to 25% reduction in revenue for the landowner. Not many landowners are willing to accept that. They have tight budgets, too.”

The University of Illinois projects a $44-per-acre loss in 2019 for a central-Illinois farmer producing a trend line yield of 207 bushels of corn per acre, with a price of $3.80 per bushel and a land cost of $245 per acre. The university’s economists also predict any cash rent above $201 per acre will lead to negative returns for farmers in 2019 under this scenario.

SHARE REAL NUMBERS. “Every landowner is different, but the No. 1 thing to negotiate a fair rent is to be honest and transparent. Show them real numbers. There’s going to be a lot of red ink next year, especially with a large soybean carryover,” Dammann says. His family farms in three counties in southwest Iowa and has 22 landowners to work with, including two in China.

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He says for some landowners, the numbers won’t matter. “Some just have a [cash rent] number in mind, and they won’t settle for anything less. But, what we do has to make sense on paper.”

Iowa law says unless you renegotiate a farmland lease or send a letter of termination to the tenant or the landowner by Sept. 1, current lease arrangements are in effect for the following year. That means many Iowa tenants and landowners started 2019 rental negotiations in the summer.

“There’s a lot of uncertainty with the trade situation. I think many landowners will say, ‘Go ahead and serve me notice, and we’ll talk about rental rates this winter.’ This means landowners will likely shop around to other farm operators in the area to see if they’ll pay more,”
he believes.

That could make it hard to negotiate the 20 to 25% lower cash rents needed this coming year to stay out of the loss column.

“If rents go down, they’ll probably go down about 15% just because of competition to rent land,” Dammann adds.

BUILDING LOYALTY. How loyal a landowner will be to a farmer often depends on the relationship they’ve built. For some landowners, it’s all about the numbers; for many, it’s the noncash effort the landowners value.

“Lately, we’ve been flying a drone over the fields in June and early July, and sending aerial photos and videos to the landowner,” Dammann says. “It’s not something we have to do. But, when it comes time to negotiate rents, the owner knows you care. Extra touches go a long way.”

Dammann even mows one landowner’s yard and finds other ways to go the extra mile when he can.

“One landowner in her 80s had a lot of tree limbs down in her yard after a big wind storm. We went over with our equipment and had it all cleaned up in a couple of hours. You find ways to let them know you care, and you treat their land as if it were your own. They remember that when it comes time to negotiate the lease.”

NEGOTIATE IMPROVEMENTS. If your landowner doesn’t want to come down in price, there are still things you can do. Iowa State University farm-management specialist Steve Johnson notes drainage improvements, as well as cover crops and other conservation expenses, will be part of lease negotiations this year.

“If the landowner doesn’t come down in rent, they should pick up the cost of land improvements,” Johnson says. Many landowners figure their rent should be about one-third of total crop revenue, or roughly 3% of the value of the land.

“Landlords should also pay to improve their land if they value soil and water conservation. Examples include investments in terraces, waterways, tile and a portion of the average $40 per acre it costs to plant and destroy a cover crop such as cereal rye,” he says.

CONSIDER FLEX LEASES. One retired farmer at a recent seminar of Johnson’s said the way to be fair to his tenant in 2019 would be to set the base rent at $175 per acre. Then, if the farmer’s gross revenue for 2019 climbs past his August 2018 projections, the landowner would receive half the increase.

Dammann uses a few flex leases. He says, “the problem with flex leases is you need to start with a low base rate because most flex leases don’t flex lower when revenue drops lower.”

BANKRUPTCY HURTS EVERYONE. The ultimate risk when it comes to cash rents that are too high is the tenant who is forced to file for bankruptcy. This is a losing proposition for everyone involved.

Miller notes in hard-hit areas, “the landowner would be wise to get a little less in rent and get 100% of the payment up front. Protecting a lien in bankruptcy court is a huge expense.”

She is in an area in southern Iowa suffering from drought this year. It’s a bit of a déjà vu feeling, as she was a banker in Davis County, Iowa, when it went through a drought in 1983.

“I’m seeing similar financial parallels,” she says, adding there’s still time for things to turn around, but it’s also possible low prices could stick around longer than anyone expects.

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