Minding Ag's Business

Cash Rent Conundrums

Elizabeth Williams
By  Elizabeth Williams , DTN Special Correspondent

Cash rent concessions were the biggest buzz in the hallways of DTN-The Progressive Farmer's Ag Summit Dec. 4-7 and predominated discussions at our four-hour workshop with professional negotiator Jack Williams. Not only are rents the biggest line item on most Midwest farms, they also represent one of the few categories where personal relationships can significantly influence outcomes.

That's not to say asking for concessions is without stress. For most landowners, it is hard to accept more than a 10% to 15% decline in cash rents in any one year, many producers note, so the process could take several years to adjust to a more manageable level.

What worked in this year's negotiations?

One operator was able to get his landowner to go from $300 per acre to $200 per acre on a five-year lease that renewed in 2017 because when prices were going through the roof during the previous lease agreement, the operator voluntarily paid the landowner large bonuses. Also, the landowner had a farm background and empathized with the operator about farming in times with low prices.

Another operator who was able to get a 30% reduction from one landowner by proposing a flex lease that allowed for a bonus if prices jump higher.

For most operators DTN talked with, it was hard to get much more than a 20% reduction and most landowners were more comfortable in the 10% to 15% lower range – which isn't a lot in this financial environment.

One operator said you have to know your landowner and what motivates them. For investor types, the farmer figured what the farm was worth if it sold today and used around a 3% return as a basis for cash rent.

For landowners who are on a fixed income and depend on the rent for living expenses, he opened his books and said this is what he could afford, and asked how could they work together to meet each others' needs.

Another operator had a landowner who needed $5,000 in December, the tenant was willing to pre-pay a portion of his 2017 rent to help out the landowner and the landowner was willing to lower the rent.

Advice given by lenders and professional negotiator Jack Williams: Be willing to walk away from land that you can't afford to rent. In this market, more land will be changing hands and more-than-normal opportunities may arise.

A flex lease that has a reasonable base price (which the operator can afford and is not out of line with area rents) plus the ability to share in higher prices and larger yields is becoming more popular.

One farm operator had this advice: Prepare your landowner in advance on where rents should be going. It shouldn't be a surprise when you go in to negotiate. The landowner needs time to process the information, especially for older people. And they may need time to reduce their cash needs.

A year in advance may not be too early for those operators who use multi-year leases.

Another farmer said the value of one-year leases is the increased communication with the landowner. That being said, don't wait until a month or two before renewing the lease to tell the landowner that you need a lower rent in order to keep farming that land.

For some landowners, it's all about the relationship you build with them.

For others, it's strictly numbers. "One owner told me, 'I'll tell you right now, I don't care about our relationship, this is an investment to me,'" said one farmer. But the owner was willing to use the current value of the farmland (not the amount he paid for the land) to determine the current return/cash rent. So, as land values have come down, the farmer's rent is reduced.

Follow Marcia Taylor on Twitter@MarciaZTaylor

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RSimpkins1489533924
12/12/2016 | 7:38 AM CST
It is oh so easy just to sharecrop. Have seen no change in cash rented farms around here. The big dairies will pay most anything just to haul manure on. Not sure how they do it with milk prices the way they are. Trouble with rents is greed on both sides drove them too high in the first place. High commodity prices don't normally last more than two or three years in a row , so why would anyone lock in a five or seven year maxed out contract.