INDIANOLA, Iowa (DTN) -- Five months ago when farmers were looking ahead to a grim 2016, "we thought we would see a lot of pressure on cash rents," recalled Jim Farrell, president of Farmers National Company in Omaha. "But in reality, most professionally managed cash rents are staying even or are down 5% to 8%." Only peak rents that hit $400 or higher have seen more pressure, Farrell added.
Farm operators looking for a big cut in 2016 cash rents will likely be disappointed, based on rent negotiations so far. Quality land held its premium. High yields in the Western Corn Belt also helped farmers close the gap on losses for 2015, reducing landowner sympathy. However, in the Eastern Corn Belt excessive 2015 rainfall hampered yields just as grain prices took a turn for the worse -- putting more pressure on 2016 cash rents in those areas.
In waterlogged Indiana, anything over $300 will likely come down, said Howard Halderman, president of Halderman Real Estate and Farm Management Services in Wabash, Indiana. "For cash rents in the $250-$300 range, some will remain the same and others will drop 5% to 10%, depending on the farm."
This is the first real rent adjustment in decades, he said. "Generally, landowners want a long-term relationship with their operators," Halderman added. "They recognize the outlook for price of grain is putting a lot of pressure on profits. They don't want to put their tenant out of business, so top rents are being pressured lower."
Even in hotbed rental markets like Iowa, peak rents have cooled, said Brian Feldpausch with Peoples Company, headquartered in Clive, Iowa. "Rents in the $300- to $350-per-acre range, they are not changing much. But those over $350 per acre just do not make sense," said Feldpausch.
Randy Hertz with Hertz Farm Management in Nevada, Iowa, has been surprised at how steady cash rents have stayed. "It really depends on the quality of the farm and what the level of cash rent was in the past two to three years as to what kind of adjustments are being made for 2016," Hertz explained. "This is the first downward rent adjustment in a long, long time. Landowners would love to see rents stay the same, but in some of the higher rent areas or on some of the less desirable ground, a 10% to 15% decline from the (all-time) high seems to be the common decrease in rents."
Historically, cash rents tend to lag the market and come down slower than farm income. "Landowners are upset if they have to decrease their rent. But I tell them that's today's economics," Hertz said.
"Most importantly as a landowner, you need to know what profit your farm is producing," advised Hertz. "There's a larger variance in farms than many people realize. Negotiating is not easy for most people; they are not comfortable in that situation. But you need to have the discussion. And, if you don't have all the facts, you can make the wrong decision."
MORE LAND FOR RENT
In recent years, some older farmers delayed retirement because of the high profits, but they may not want to take the risk of losing money in 2016. "I expect we'll see more farmers retire when they put all the (cash flow) numbers together for the 2016 crop," Hertz noted. Halderman also expects more operators to retire and neighboring farmers are glad to pick up more land.
"On farms we manage where the operator retired this year, we let those farms out for bids, and rent levels stayed the same or went up a little," Halderman said.
A lack of financing may also mean an operator change. "We saw just a few cases this last year where a tenant couldn't make his March 1 rent payment," said Farrell. "It hasn't been a big problem. But I worry about the operator who rents most of his ground and has machinery as his main source of collateral. His lender may have a hard time lending him money for high cash rent. We could see more farms change operators this year because of lack of financing."
Farrell would advise any farm operator in that situation to "get out in front of it. Talk to your landowner now if you are having trouble getting financing and say, 'I don't think this will work.' If you wait until March 1, the landowner may think he or she won't get any rent from you and rather than renegotiate, will hire another tenant. It's better to over-communicate and do so before the deadline," said Farrell.
FLEX RENTS REMAIN POPULAR
"On the new leases we're writing, about half are cash flex leases with the other half, cash rent," said Halderman in Indiana. "On some of our leases, we've reduced the base rent, such as from $250 to $225 per acre, but then we've also reduced the base gross revenue that protects the tenant to cover his input costs before factoring the bonus. So, potentially, the landowner can recapture more of the upside if prices or yields greatly improve."
Hertz has also seen a move toward adjustable flex leases. "But I don't see flex leases dropping their base rents at this point," Hertz said.
Higher yields in 2015 kept many farmers closer to breakeven as commodity prices nosedived. That may be enough for them to get the next crop in the ground and keep the status quo in rental rates for 2016. For most landowners and operators, that cash rent level is a narrow tightrope that for now seems to be holding taut.
Each year, DTN presents an outlook series on what is expected for the year ahead in various areas of agriculture. This is the third story in a series DTN is running that looks at what farmers can expect as the hot topics for 2016 in areas such as farm finance, land prices, ag and the environment, agricultural policy, crop inputs, livestock, transportation and others. We welcome your feedback on what you think the year will be like at email@example.com.
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