Cash Rent Conundrum

Uncertainty in the commodity markets is preventing many landowners and farm operators from locking in cash rents for 2019. This fall, “in Iowa, there will likely be a lot of land in ‘loose hands’ as owners shop around,” notes Justin Dammann, corn/soybean, cow/calf producer, in Essex, Iowa.

“Farm operators cannot afford to lose money by paying the same rents as last year,” says Leslie Miller, vice president of Iowa State Savings Bank, in Knoxville, Iowa.

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

“The landowner admitted his ground was not that good,” Miller says. With yields averaging 175 bushels, 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.

“Although the operator would have to pay six months interest on half of the rent normally paid in November, I think he would be able to do that for the reduction in rent,” Miller says. “Landowners should be willing to negotiate.”

Dammann says steady cash rents complicate cash-flow projections for 2019. “You can be $80 to $100 per acre away from making money,” he explains. “So, 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-bushel corn with a price of $3.80 per bushel and a land cost of $245 per acre in 2019. The university’s economists also predict any cash rent above $201 per acre would lead to negative returns in 2019 under this scenario (207 bushels per acre at $3.80 corn).

In 2018, Missouri average cash rents bounced back to levels reported in 2014 and 2015 after falling back a slight 3% in 2017, according to a University of Missouri survey.

In western Ohio, top cropland cash rents in 2018 were expected to average $235 per acre, notching down 2.2% from $240 per acre in 2017. This is on land averaging about 211-bushel corn with a land value of $8,663 per acre, reports Ohio State University Extension in its 2018 land survey.

Because land values have been relatively stable, landowners may expect similarly stable cash rents. “In this environment, that’s an unrealistic expectation,” Miller explains.

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

“However, for some owners, my numbers don’t matter,” he admits. “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.”

Dammann prefers to have his lease negotiations wrapped up by Sept. 1, but this year, he believes more landowners hesitated to set a 2019 lease rate in August.

“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 says.

Dammann notes that could make it difficult to negotiate the 20 to 25% lower cash rents needed to avoid red ink. “If rents go down, they’ll probably go down about 15% just because of the competition to rent land,” he adds.

How loyal your landowner will be to you often depends on the relationship you’ve built. For some landowners, it’s all about the numbers, but 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 mows an owner’s yard and finds other ways to go the extra mile. “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 says drainage improvements, as well as cover-crop and other conservation expenses, will be part of the lease negotiations this year.

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

“But, 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.

TIME FOR 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 rather than above $200 that he was getting in cash rent. Then, if the farmer’s gross revenue for 2019 climbs past his August 2018 projections, the landowner would receive half the increase.

Dammann also uses flex leases. “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.” The key for flex leases to work in this environment is to get a base rent set at a fair price, he says.

Miller says the ultimate risk of too-high cash rent is the tenant could file bankruptcy. 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 a drought this year and was a banker in Davis County, Iowa, when it went through a drought in 1983. “I’m seeing similar financial parallels,” she says, adding while there’s still plenty of time for things to turn around, it’s also possible low prices could also stick around longer than anyone expects.

MEDIATION SERVICES:

Cash rents are just one chink in the armor of lower profits for farmers struggling to put a cash-flow together for 2019. Higher yields, decent crop insurance revenue guarantees and early-in-the-year marketing opportunities will keep many producers afloat this year. However, those whose lender won’t advance any more credit may turn to professional Credit Mediation Services for help.

USDA updated a list of agriculture mediation services in January 2018. You can find it online under “Agricultural Mediation Program--USDA Farm Service Agency.” The website is: https://www.fsa.usda.gov/….

Iowa, Minnesota and South Dakota have mandatory farmer-lender mediation requirements. Most state mediation services are voluntary.

In Iowa, the mandatory creditor-farm mediation provision applies to debts of $20,000 or more for which land, equipment, livestock or crop are the collateral.

In Minnesota, no creditor can start a proceeding to collect a debt of $15,000 or more against a property unless the offer of mediation is extended and, if the farmer chooses, completed.

South Dakota requires parties to go through a financial mediation program before a lender can start to foreclose on $50,000 or more in debt.

EDITOR’S NOTE: The USDA Mediation Services listing for Minnesota has a wrong phone number. Here is the correct information: 800-232-9077, 8:30 a.m. to 12:30 p.m. Monday through Friday. Or email: fil@umn.edu.

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