The Cold Reality of Cash Rents

By Greg Vincent

4/11/2008

The land outside Tom Martin’s farm office lies so flat that the earth’s curvature appears to rise up and meet the skyline. From this vantage point, he can see anything or anyone coming for miles around. Yet, the challenges sparked by $5/bu. corn and soybeans in the teens were difficult to see approaching. Accepting surprise setbacks at the hands of this unprecedented economic time are even more difficult to stomach.

With the convergence of intense competition for land and cash rents rising on the tide of high commodity prices, central Illinois is the starting line in a land race being run across the Midwest. Some farmers wonder how they will stay in the race, while titan farm tenants—amassing 20,000 to 40,000 acres—bid up cash rents like never before. The titans ponder how they can get more acreage as quickly as possible. Others question if a finish line exists.

Pacesetters. The new-era land race posts unfortunate circumstances for farmers like Martin, who found himself competing with Schlicht Farms, a Pleasant Plains, Ill., operation that farms more than 35,000 acres. Already faced with a 20% across-the-board increase for cash rents last spring, the 1,700-acre Mt. Pulaski farmer learned a 250-acre farm, what he calls a base for his operation, was sold in a 1031 land exchange. He offered a 40% increase over his previous rate, yet the eleventh-hour bid was not accepted. This marks the second year he will watch another farmer put down roots in the field treated as his own for 25 years.

“I ran the numbers and looked at what we thought we could do. We increased the bid, and I thought that was pushing it,” Martin explains.

While finalizing spring plans, Martin ponders the irony of this magnificent period. “I feel like I’m caught in the perfect storm. We have $12/bu. beans, $5/bu. corn, 1031 land exchanges, biofuels, a weak dollar keeping exports strong and high-yielding biotech seeds,” he says. “There are a lot of really aggressive farmers who are growing quickly. The economics are out of control. With crop insurance, you’re almost guaranteed a profit, so people can afford higher rents.”

Those paying top-dollar rents, like Schlicht and Rick Rosentreter of Carlinville, are the pacesetters.

Rosentreter, a general partner in Illinois Family Farms, doubled his acreage in 2007. The partnership’s 2008 acreage will nearly double again. The central Illinois farmer  feels he has to expand to be competitive, and he will pay higher rents to meet his aggressive goals. He plans to expand considerably beyond the 25,000 acres he will plant this year.

New rules in race. The factors creating Martin’s perfect storm make it difficult to bring historical perspective to this new era, says University of Illinois Economist, Gary Schnitkey. The 1970s saw a similar period of rapid commodity price increases, but cash rents were not as common. What USDA data are available, he says, show rents didn’t increase as rapidly as they have in this recent boom.

Gaining a handle on how quickly rents have risen recently is also difficult, he says. Most of the late-negotiated rents he can verify are in the $200 to $250 range. However, he has confirmed rents as high as $350.

Schnitkey suspects negotiations continued to rise from fall to spring as grain prices remained strong, but market volatility makes for a tenuous situation. “We’re looking at prices that cause $100 to $200 changes in what people can pay for cash rent.”

While headline-grabbing $400/acre rents aren’t widespread, Schnitkey says high rents can work if commodity prices hold—and the extreme end of the rent spectrum will be dictated prices farmers receive for production. To maintain top rents, he says farmers have to assume the $5/bu. price for corn holds. In the end, the economist believes the situation will settle at a point where costs and prices received bring margins to a level where they were two years ago.

Regardless of where commodity prices end up, many farmers are betting on higher prices in the short term. The March 13, 2008, issue of LandOwner newsletter cites several instances of $350+ cash rents, and some topping the $400 plateau through Illinois and parts of Iowa.

LandOwner Editor Mike Walsten says the majority of these are late-signed leases and involve smaller tracts of 160-acres or less. However, a 2,700-acre Iowa farm with a one-year lease went for $400/acre this spring, payable in full, up front. Those rents are few and far between, but the trend is increasing and a quick reversal isn’t expected, even if commodity prices retreat as rapidly as they rose.

“My hunch is it will take several years after a drop in grain prices before you can see the edge coming off these $350 to $400 cash rents,” Walsten says. “These guys are aggressive enough to get the ground that they’ll keep pumping it up there in order to keep the volume up.”



Land sales across the Midwest now consistently top $8,000/acre for quality ground, Walsten says, but the $400/acre cash rents may indicate land isn’t near the top yet. Applying a 4% capitalization rate, and assuming $400 cash rents become more common, he says $10,000/acre values can easily be projected.

Nationwide issue. The race for land here isn’t new, says Logan County Extension agent John Fulton. An Irish immigrant named William Scully amassed 33,000 acres of Logan County farmland in the pre-Civil War era. Cash rent agreements were born here, and maybe, Fulton says, this intense competition is just natural evolution.

Martin says nearly everybody once followed unwritten rules. Rental agreements were as good as deeds and you didn’t take a new lease unless the current tenant was ready to find more fertile fields elsewhere. If a neighbor owned ground and retired, you waited for him to ask you to farm his ground. It was common and comfortable like a Sunday afternoon family dinner.

Farmers responding to a Top Producer reader survey employ a variety of tactics themselves or report other farmers doing things to gain land that were previously considered taboo in rural America. These include introductory letters to landlords, agreeing to long-term leases and, most often, cold calls and personal visits to landowners. Others have taken to advertising in local newspapers requesting ground and offering higher rents, sight unseen. These tactics seem to work, too. More than 14% of the respondents have lost rented ground to other farmers.

With 96% of the nationwide survey respondents renting at least some land, competition stretches beyond the Illinois plains. Nearly 90% of the respondents believe cash rent rates will continue to ascend in 2009.

The high commodity prices create unusual competition from high-value crops, as well. In Michigan, corn and soybean grower Wayne Wilds sees rents rising due to competition from fruit and vegetable growers. “It’s absolutely crazy,” he says. “They can’t find enough ground to cover their contracts, so they’re paying outrageous rents—$400/acre to $600/acre.”

Survey respondent Rod Schlieman of Western Minnesota is concerned that the Sunday afternoon family dinner mentality is being replaced by a fast food, drive-through lunch. He struggles with competition in his area, as well, and he wonders how he will manage to have his 19-year old son join the farm when he graduates from college. “I farm 1,300 acres, enough for me. When my son finishes college, if we can acquire another 1,000 acres, that will work.”

However, another farmer also has a college-age son he wants to bring to his operation, but he farms on a larger scale and believes bringing his son in will require nearly doubling his 6,000 acres. Schlieman says this farmer pays high rents that reduce margins, which means “he needs more acres to make a living, leaving less opportunity for everyone else.”

Despite controversy, Rosentreter is a typical family farmer by nearly any definition. He lives with his wife and two young sons in the house where he grew up. His partners in the farm he has taken over from his father include his two brothers, and his wife is involved in the farm operation’s business management.

Yet, area farmers hardly view this business as a family farm. Illinois Family Farms, the partnership Rosentreter formed last year with his 7,850 acres, 5,500 acres from Rich Killam and 660 from Matt Weyen, has become a lightning rod for controversy, and a symbol for many about what plagues rural areas.

Ironically, a driving force for Rosentreter’s vision and strategy arose when he was faced with a situation similar to Martin’s a decade ago. While working at the bank in Carlinville and farming 2,000 acres with his father, he was outbid on a field they had farmed for years. Soon after, he was drilling beans and “a parade of large equipment rolled by,” and he saw the titans knock out the field in hours. “We weren’t competitive. I think farming is going that way now, and we need to get bigger to stay competitive.”

That mentality, say farmers who will talk but not publicly, breaks rural America’s unwritten code. They say the tactics used—including exorbitant rents, offering payment up front and prospecting landlords—are immoral.

Titans are accused of sending letters and checks with the understanding when the check is cashed, the landlord enters a rental contract. Yet, the many people who say checks are sent only know of somebody who knows somebody else who received a check. Killam and Rosentreter both deny doing this. Rosentreter doesn’t hide his determination for growth. He waves off rumors as rooted in misunderstandings of his long-term strategy.

Rosentreter employs two full-time marketing people with responsibility to work with landowners in rent acquisitions and maintenance.

“The landowner is our customer,” he explains. “We maintain a database of landowners and our marketing department’s responsibility is to keep the ground we have and find more to rent.”

They use five primary tactics to secure land, Rosentreter says. They  send introductory letters to landowners, but typically as a follow-up to landowners who visit the company Web site (www.illff.com) and request information. This is where he gets many leads. They also make cold call visits to landlords. The remaining three tactics, he says, are proprietary.

Allen Lash, who is president of AgriSolutions LLC and a business consultant to Rosentreter, says farmers need to ask themselves where they want to end up. “Anger toward large producers is not productive. Farmers need to focus on managing where they are.” That’s advice Rosentreter has taken to heart.

He says Lash is “a genius” and credits Lash’s consultation for his success. Rosentreter has learned to manage his managers, and the two are now readying for the next stages of business development.

Much of the partnership’s growth, Rosentreter says, is through mergers and acquisitions of existing farms, which allows him to bring other farmers into the partnership who may not have other options available.

Concerns about conditions. As for social implications, Rosentreter says this expansion method answers concerns about social structures his critics accuse him of destroying. He uses Weyen’s partnership as an example of putting this into practice. By joining Weyen’s 660 acres with the more than 13,000 acres Rosentreter and Killam brought to the partnership, Weyen has a sustainable business. Rosentreter also points to the more than 30 people employed by Illinois Family Farms as an example of a business paying good wages and keeping the money local.

Martin is concerned about the impact beyond the titans’ immediate headquarters. “Farming is no longer a local activity,” he says. “The dynamics have changed and we’re losing social connections. I understand the economics and the business model behind it, but I don’t like what’s happening with the social side and the community side. It has changed the dynamics of the community. It’s changing the social structure when we get farmers from 50 to 60 miles away. They come in, farm the ground, and they go away. They don’t do business locally and they don’t participate in local activities.”

“We have always treated it as a way of life,” Martin says. “Maybe it’s not a God-given right to farm. Maybe it is just strictly business.”

A little bit of normalcy in agriculture would do everyone some good, says risk management specialist Moe Russell of Russell Consulting Group in Panora, Iowa. Unlikely, in today’s economy.

If the cash rent market has your head spinning, Russell offers several suggestions to help you deal with the non-normalcy of that market.

It’s easy to get wrapped up in the reports of farms renting for $400/ acre or more. Most aren’t, Russell says. “Cash rents have gone up, and they needed to. But in most cases, the tenant can still afford current cash rent levels if they manage the risk. Even $400/acre land can be profitable in some cases. Today’s cash rents still haven’t caught up with the commodity price increase. That may change this fall.”

Keep costs variable as much as possible. “It’s a management principle used in other industries that simply means you maintain operating leverage by minimizing fixed costs,” he says.

With cash rents, that means stick with annual rather than multi-year contracts, Russell says. “The higher this market goes up, the further it’s going to eventually fall. You don’t want to be locked into $400/acre cash rent when that happens.”

While he’s usually not a fan of flexible cash rents, Russell believes they can be a good risk-management tool during volatile economic times. “Normally, I don’t like flexible cash rents because the tenant pays for all the inputs that increase yield and revenue, but doesn’t capture the full benefit,” Russell says.

“Right now I think landlords are as interested in flexible cash rents as tenants. They see commodity prices at historical levels and want to get in on the action. With the possibility of corn retreating to $3.50 and beans to $8, there’s probably a place for flexible leases.” —John Russnogle

To contact Greg Vincent, e-mail gvincent@farmjournal.com

Top Producer, Spring 2008