Cash Rent Walk-Offs

December 23, 2016 07:02 AM
 
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Farmers are more willing today than in past to say no to high rates

For Indiana corn-and-soybean producer Jason Wykoff, determining how to handle landlords who aren’t interested in long-term relationships has become easier over 22 years of farming. Just this past year, he says, he walked away from 1,200 acres because a landlord had asked too much for rent when it came time for renewal. That’s a growing trend among farmers, according to Pro Farmer’s annual LandOwner Survey. 

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“We find 44% of our members and subscribers are willing to walk away from a cash lease if that lease is not lowered going into 2017,” says Mike Walsten, editor of LandOwner, part of the Farm Journal Media family. The percentage of producers who “absolutely will” walk away if there’s not a significant cut in cash rents is up 2 points from a year ago.

There isn’t a widespread movement to break contracts and walk away from cash rents, points out James Mintert, director of Purdue University’s Center for Commercial Agriculture and a professor of agricultural economics. Yet it’s very common for farmers to not renew a lease because a landlord won’t budge. 

“Based on the returns, from my perspective, that’s entirely reasonable,” Mintert says.  

Reasons For Leaving. Wykoff decided to not renew the 1,200-acre lease when his landlord ended their share-farming arrangement and requested cash instead. Wykoff says the price was too much for him to be profitable and his relationship with the landlord was not strong. 

“This situation started us on a path of deciding we had to put landlords in two categories: one that was those that value relationships and want to work parallel with us into the future, and those [who], for whatever reason, just need to chase the highest rent,” Wykoff says. 

Mintert advises farmers to talk to landlords about lowering rates before washing their hands of a piece of rented ground. “You’ve got to have conversations with your landlords and explain how the row-crop business has changed,” he says.

Cash-rent rates are declining, which is good news for farmers. In Wykoff’s home state of Indiana, rates have been on a steady decline since peaking in 2014, according to a Purdue survey conducted in July. 

“I don’t think that’s reflective of people walking away from leases,” Mintert says, “but more reflective of farmers having conversations with their landlords that prices from years past aren’t the world we live in now.”

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Trend Picks Up. USDA data support a nationwide cash-rent rate decline. This year, rates fell 6% nationwide year over year, the first time that’s happened since 2007. And 74% of farmers included in the LandOwner survey expect cash rents to decline next year.

“This suggests that the issue of decreasing the cash-rental rate for 2017 will likely come up in three out of four rental rate discussions this fall and winter,” Walsten says.  “The decrease anticipated is relatively restrained, however. Some 46% say they expect rents to decline by less than 10%. That’s up from 42% who looked for a decline of less than 10% in 2016 cash rents.”

Whether farmers stick with a loyal landlord or walk away from a pricey cash rent, they will face a number of difficult decisions over the next year.

“Rent decisions can be emotional,” Wykoff says. “Once we try to take the emotion out of it, they actually then become very easy.”  

To subscribe to the LandOwner newsletter for regular land analysis or to purchase the full text of the 2016 survey, visit LandOwner.com.


3 Tips to Negotiate Lower Rent 

Be Upfront. When producers rent land, it’s all about communication, says Purdue University’s James Mintert. Even if you’re in a long-term rental relationship or if your lease renews annually, you need to view it as a partnership. “When returns to row-crop production were increasing dramatically, [some] people were transparent with their landlords about how returns had changed and made agreements to increase rental rates,” he says. “They are in a better position now to go back to landlords and ask for a shift down.”  

Have A Good Reputation. When farmers lease land for the long term, you become a steward of the land’s long-term productivity and sustainability. “It’s recognizing as a farmer that the landlord owns an asset that has a very long lifespan,” Mintert says. “You want to have the reputation of keeping that asset in good condition.” For producer Jason Wykoff of Indiana, the issue proved to be a factor in walking away from 1,200 acres this past year. “We want to make long-term investments and build soil health,” Wykoff says. “Without a good strong relationship and a contract that allows for that, there’s no room to do those things.”

Consider A Risk-Sharing Arrangement. Often, landlords are hesitant to shift rental rates down based on commodity prices because there’s a chance prices could increase within the terms of the lease. Mintert suggests developing a plan to share the risk with your landlord. “Establish a base cash rent, and if gross returns are above a certain amount, then perhaps you start sharing profits at gross-revenue amounts above a specific threshold,” he says. “That allows the landlord to share in an unexpected increase in returns.”

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