Defining a fair rent is likely to get a little tricky this fall. Landowners read the headlines, “Cash rents have to come down” for farmers to survive. “But my landowning clients ask what about equipment costs, family living expenses and crop inputs?” said Dale Aupperle with Heartland Ag Group in Forsyth, Illinois. “They don’t want to be the only ones taking a hit.”
Therein lies the conflict. For the farm operator, negotiated cash rents may be the simplest way to reduce costs for 2016. It’s much harder to negotiate lower fertilizer and seed bills and remain highly productive. On the other hand, you don’t want to lose your land base because your neighbor is willing to pay more rent than you.
“A landowner in Mitchell County (north-central Iowa) told me he had several farmers call him this month offering $350 per acre to rent his ground,” reported Randy Luze, with Peoples Company, based in West Des Moines, Iowa. “His farm is very high quality — 90 Corn Suitability Rating (over 225 bushels per acre yield) and crops in that area look great.” A $350-per-acre cash rent has not been unusual for high-quality land in that area since corn prices peaked in 2013, he said. There’s not much incentive for that landowner to lower his rent.
“Operators who try to build in a 10% to 15% return for the risk they’re taking may have a neighbor who may not need that high of return,” said Aupperle. In central Illinois, Aupperle doesn’t see cash rents coming down more than 5% to 10% for 2016. Statewide they slipped a mere $6 per acre between 2014 and 2015, from $234 to $228, according to USDA surveys released in August.
Jim Farrell, president of Farmers National Company, based in Omaha agreed. “I don’t see cash rents dropping very much for 2016, about 10% lower if the 2015 cash rent was at the market. There will be a farm program payment coming this fall. The amount will vary greatly by county, but it will be a cash infusion into agriculture at an important time. However, we’ll likely see some stress from farmers not getting operating loans next spring,” said Farrell.
EXPECT MORE FLEX
“We’re seeing an increased interest in flexible cash rents,” said Aupperle, who uses flexible leases extensively on the farms his company manages. At Farmers National, over half of cash rent leases today already carry a flex provision.
Iowa farmland owners Fred and Lodean Cook may consider flexible cash leases for the first time this year. The Cooks work with four tenants in four Iowa counties. “If we lower the base rent, we would consider using a ‘flex’ lease to share in the upside if things get better,” said Fred. “We just don’t know what will happen to yields and prices next year. Certainly, we want the operator to do well. But farming is a business. The tenant and the landowner share the same goals — to make money,” Fred added.
Flexible cash leases are a throwback to crop-share leases with some shared risk between the tenant and the landowner, explained Aupperle. “I see more risk sharing coming back into the equation. The tenant says to the landowner, ‘You need to take some of the risk if you want that kind of return.'”
The problem with flex leases, said Cook, is you can’t get all your payment upfront. “The flex part wouldn’t be paid until Nov. 1 at the earliest.”
Leslie Miller, vice president of Iowa State Savings Bank in Knoxville, said landlords have expressed concerns about the financial viability of their tenants. “They don’t want to find out they can’t collect the last half of the 2016 cash rent. Generally, we suggest they be careful when approached by new tenants from other localities. We also advise asking more questions of tenants who will be writing checks on banks from outside the area they live.”
Miller cautioned, “Cash upfront is not a guarantee. If a farmer gives a landlord cash and then turns around and files bankruptcy in 30 days, that cash could be pulled back into the bankruptcy, and the lease on the farm could become the property of the bankrupt estate. Thus, the landlord may find himself at the mercy of the bankruptcy court as to how much cash rent they actually receive and when they get it.”
Miller advised staying with a tenant who has always paid you and possibly working with a flexible cash rent if the landlord doesn’t want an “absolute” lower cash rent.
“Truly, I don’t want to lose my tenant. He’s a really good farmer. But I have bills to pay, too, and I want a good return on my investment,” offered Linda Osborn, an owner with farmland in Black Hawk County in northeast Iowa.
That echoes the sentiment of all the landowners interviewed by DTN. For the most part, they are willing to give a little on cash rents, but not a lot. “Landowners are not really empathetic,” said Farrell with Farmers National. “Their taxes are going up and many didn’t raise their rents in the high income years.”
But they don’t see a lot of suffering on the farmstead. “We’ve heard some landlords express concerns about reducing rents — citing the fact that their tenants have new and very expensive pickups, tractors, combines, etc.,” said Iowa banker Miller. “Some landlords think the farmers need to cut living expenses before they cut cash rents.”
However, Miller asked those landlords if a farmer cut $1,000 per month or $12,000 per year from his living expense, would it be sufficient? “Usually, the landlord agreed that it would be a struggle for anyone to cut $1,000 per month. Then, I point out that if the farmer could cut that much (and most people can’t), it would only amount to saving $8 per acre over 1,500 acres. Obviously, that won’t do as much to help as a $40- to $50-per-acre reduction in cash rent.”
Miller’s advice to any farmer negotiating cash rents: “Leave the 2016 4×4 pickup at home and maybe even wear jeans with patches on them — if you have them.”
BE MORE TRANSPARENT
Marcia Hansen of Indianola, Iowa, owns a farm in Webster County. She wants her tenant to be open about what is happening on her farm. “We have to work better together,” said Hansen. “I would like to know more of the details about fertility. Also, how much did production improve after the land was tiled? I want a tenant who is a good steward of the land, and I also want to know how we can work together to improve the farm.”
The Cooks require that type of information in their cash lease agreement. “We get a copy of the yields submitted to the federal crop insurance, and we require a list of seed varieties, chemical and fertilizer my tenant used. We get receipts from the supplier or a manure estimate. We also require soil testing and we get a copy of that. A tenant would have to provide that to a professional farm manager, so I’ve incorporated those requirements into my leases,” said Fred Cook. “We don’t tell our operators what to do. We just want transparency.”
More sophisticated farm owners and investors are requiring a higher level of renter accountability than in the past. “With the amount of technology out there, we want a history of what has happened on my land,” Cook added. “I want a tenant with a cooperative attitude to establish and maintain a detailed history.”
Cook has three reasons to collect data: (1) To defend against a potential future lawsuit concerning water pollution, pesticide contamination or soil run-off; (2) To keep track of the fertility needs of the soil; and (3) When the property is sold, to provide detailed soil health and conservation information.
Purdue University ag economist Mike Boehlje advises farmers to be “as transparent as you can” with their landowners. “Show him how much you’d lose by paying current rent level.” But, realistically, if you have to pay more than you’d like just to hold onto an important part of your operation, the landowner may be more open in negotiating next year.
“Some people just need longer to process a change they were not expecting, nor prefer,” said Boehlje.
Transparency is the new buzzword. “One new tenant we interviewed overused the word ‘transparent,'” recalled Cook. “But he was right; he has shared a lot with us. And so far, it’s turned out to be a wonderful relationship.”