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Why You Should Renegotiate Your Cash Rents for 2015

July 25, 2014
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In many cases, projected 2015 cropland returns will be lower than current cash rents, and will likely require renegotiating for lower cash rents.

By Gary Schnitkey, University of Illinois

Actual cropland returns in 2013 and projected returns in 2014 and 2015 are considerably below returns from 2010 through 2012. In many cases, projected 2015 returns will be lower than current cash rents, and will likely require renegotiating for lower cash rents. This article evaluates these situations by 1) identifying farms requiring adjustments in cash rents, 2) identifying how far cash rents must be lowered, and 3) providing comments for both land owners and farmers.

Farms Requiring Adjustment Downward

Two factors will impact the need for adjusting rents downward. The first is the farm's cash rent relative to the average rent for farmland of similar productivity. There is a considerable range in cash rents for farmland of similar type. Some rents are $100 per acre higher than the average, and some farms can be $100 lower than the average. Those cash rents that are relatively lower will not require adjusting downwards. Downward adjustment in cash rents likely are needed for relatively high cash rents.

Sources for average cash rents are readily available. A map with average cash rents by Illinois County is available. This county data is from U.S. Department of Agriculture. Based on this data, average cash rents for different expected corn yields have been constructed:

  • 140 bu. expected corn yield has an average cash rent of $151 per acre,
  • 160 bu. expected corn yield has an average cash rent of $205 per acre,
  • 180 bu. expected corn yield has an average cash rent of $259 per acre, and
  • 200 bu. expected corn yield has an average cash rent of $313 per acre.
     

The second factor is how fast cash rents on a farm have gone up in recent years. Between 2006 through 2013, average cash rents increased in Illinois by an average of 7.7% per year. This means that the average cash rent is 68% higher in 2013 as compared to 2006. If the cash rent on a farm has lagged these increases, there may be rational for keeping the cash rent high into 2015.

As an example, take a farm that has a 200 bushel expected corn yield that had a cash rent of $179 per acre from 2006 through 2012. The cash rent then increased to $300 per acre in 2013. Keeping the $300 cash rent in 2015 could be justified because the landowner did not get as much return in 2006 through 2012, even though the farmer likely will face a loss. (As an aside, allowing cash rents to lag agricultural returns is not a recommended practice.)

Extent to which Rents need to be Adjust Downward

Cash rents need to be below operator and land returns for the farmer to have a positive return. The 2015 Illinois Crop Budgets can be used to estimate operator and land returns. Table 1 shows estimates for differing commodity prices.

table1b 072414

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RELATED TOPICS: Farm Business, Land

 
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COMMENTS (7 Comments)

iadave
What about us guys that just sent a bigger check to our land lords? My profits have not been outstanding, but my rent has gone up 5x. This year the landlord on one farm will probably get 100% of the crop. My landlord shared in the good when it came. They need to help with the bad now.
10:11 AM Jul 28th
 
Landowner - Hillsboro, IA
It stumps me as to why you would suggest the landowner lower his rent as soon as grain prices slip south. In my area, and I think most areas, it wasn't the landowner who raised rent, but renters who bid them up. If you take your average land price and your average rent, you will find out the landowner is only getting about 3 to 4 percent return for his or her investment. Whereas the chemical,fertilizer, seed and machinery dealers work with a 30 percent or more profit margin. So go to them and ask them to lower their prices and see what kind of an answer you get. Your barking up the wrong tree, I still get two or three farmers this time of the year stopping in asking for a chance to rent my farm, one just yesterday. The demand is still there. I have no intention to lower my rent.
4:51 PM Jul 27th
 
- Cut Bank, MT
Harold, I totally agree with you. If it is the year to negotiate, then do it. Don't default. If you have unmanageable debt that is your fault for paying too much in other expenses. Machinery, Seed, Fertilizer, etc... Negotiate better with them and blame the people that think we need to "feed the world with gmo". we do and look what happens.
7:03 PM Jul 25th
 
- IA
Maybe Landlords shouldn't rent to BIG RICH FARMERS then and give a younger/smaller farmer who will take care of their ground a chance,(i.e. fertilize every year, lime when needed, re-seed waterways, spray fence lines, and tile wet spots etc..) at a little bit lower price, which in turn will make their ground worth more in the long run.. We take a lot the risk out here, their return is always consistant. Maybe they need to educate themselves before making a tenant choice instead of trying to bully the tenant for more money!
3:06 PM Jul 25th
 
- IA
Maybe Landlords shouldn't rent to BIG RICH FARMERS then and give a younger/smaller farmer who will take care of their ground a chance,(i.e. fertilize every year, lime when needed, re-seed waterways, spray fence lines, and tile wet spots etc..) at a little bit lower price, which in turn will make their ground worth more in the long run.. We take a lot the risk out here, their return is always consistant. Maybe they need to educate themselves before making a tenant choice instead of trying to bully the tenant for more money!
3:06 PM Jul 25th
 
Harold Smith - IA
If my tenant comes to me and wants to "renegotiate" (i.e. default) on my existing lease with him, you better believe he will be fired that day. These farmers made so much money at the expense of us landlords during the upcycle. These rich farmers shouldn't make promises they can't keep, even if Farm Credit is willing to loan huge amounts to any farmer with a pulse. So many of these big time operators are about to get hammered by years of low crop prices and they absolutely deserve it. They had a once in a lifetime opportunity to pay down debt and save (phony corn ethanol boom) and instead most of them went out and borrowed and expanded aggressively on everything from pole barns to unecessary equipment to brand new trucks. The who industry is hugely overleveraged, but Farm Credit, Purdue and the farm "management" companies are too blind to see - they compare the total debt load against today's inflated land prices. Adjust the land prices to pre-ethanol bubble levels and you will see there is more debt than ever before. For those who have saved, paid down debt and used caution we are about to have a huge opportunity expand at the bottom of the cyle, which is the only way to make money in this game.
12:10 PM Jul 25th
 
Harold Smith - IA
If my tenant comes to me and wants to "renegotiate" (i.e. default) on my existing lease with him, you better believe he will be fired that day. These farmers made so much money at the expense of us landlords during the upcycle. These rich farmers shouldn't make promises they can't keep, even if Farm Credit is willing to loan huge amounts to any farmer with a pulse. So many of these big time operators are about to get hammered by years of low crop prices and they absolutely deserve it. They had a once in a lifetime opportunity to pay down debt and save (phony corn ethanol boom) and instead most of them went out and borrowed and expanded aggressively on everything from pole barns to unecessary equipment to brand new trucks. The who industry is hugely overleveraged, but Farm Credit, Purdue and the farm "management" companies are too blind to see - they compare the total debt load against today's inflated land prices. Adjust the land prices to pre-ethanol bubble levels and you will see there is more debt than ever before. For those who have saved, paid down debt and used caution we are about to have a huge opportunity expand at the bottom of the cyle, which is the only way to make money in this game.
12:10 PM Jul 25th
 



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