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Cash Rent Conundrum
Monday, August 20, 2018 8:31AM CDT
By Elizabeth Williams
DTN Special Correspondent

INDIANOLA, Iowa (DTN) -- Land values are holding steady despite the tumble in commodity prices, and the good news is that's propping up equity in farm country, allowing sufficient collateral for land-owning operators to borrow funds. Unfortunately, stable land values also underpin landowners' perception that cash rents should hold firm.

"In this environment, that's an unrealistic expectation," said 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 met with one southcentral Iowa landowner who got $225 per acre cash rent in 2018. After running the numbers, she told him that 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 told DTN. With yields averaging 175 bpa, 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 upfront.

"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 said. "Landowners should be willing to negotiate."

Justin Dammann, who grows corn and soybeans and raises a cow/calf herd in Essex, Iowa, said steady cash rents complicate cash flow projections for 2019.

"You can be $80 to $100 per acre away from making money," he said. "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 trendline yield of 207-bpa 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 to farmers in 2019 under this scenario (207 bpa at $3.80/bu. corn).

SHARE REAL NUMBERS

"Every landowner is different, but the No. 1 thing to negotiate a fair rent is to be honest and transparent," said Dammann, whose family farms is 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 admitted. "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, the current lease arrangements are in effect for the following year. That means many Iowa tenants and landowners are in the middle of 2019 rental negotiations.

Dammann prefers to have his lease negotiations wrapped up by Sept. 1, but this year he believes more landowners will hesitate 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 said. "After Sept. 1 in Iowa, there will be a lot of land in loose hands as owners shop around."

That could make it hard to negotiate the 20-25% 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," said Dammann.

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 said. "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 said 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 said. 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 said.

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 a few 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 said.

A BANKRUPT FARMER DOESN'T PAY HIS BILLS

Miller said 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 said, 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.

(KD/ES)


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