Thin margins should send tenants, landlords back to the table to share risk
Farmland leases are usually sticky before going up or down. In this, the second year of soft farm income, lease rates are softening, too. But the changes won’t likely be dramatic.
In a recent survey by Farm Journal Media’s LandOwner newsletter, more than 70% of respondents said they expect cash rents to decline in 2016, from less than 10% to more than 20%. Twenty-five percent of survey respondents expect rents to remain unchanged, with the remainder expecting a small increase.
There is often great diversity on lease rates, even in a given county. Low crop prices and softening farm income are eroding high-dollar lease rates as stress begins to show.
“Farmers can make it through a year or two with built up reserves,” says Nebraska farmer Brent Gloy, a former ag economist at Purdue University and blogger at www.ageconomists.com. “But when things tighten, you see changes in rental agreements.”
LandOwner editor Mike Walsten believes crop prices will keep pushing rent downward, with a subsequent impact on land values over time. He expects more defaults—or producers letting leases go to avoid defaults. Lost lease ground will be picked up, but at a lower rental rate.
“Last year, we saw high-dollar leases coming down by $50 to $100, but there were a lot of leases at $150 to $250, and those didn’t change much. In Iowa, the average lease came down by 5%,” Walsten says. “I think we’ll see leases coming down on average by 10% to 15% for the 2016 crop.”
At this point, even average cash rent rates are tough on tenants. If a producer is paying anywhere near average rent, the math likely translates to a loss, says Gary Schnitkey, University of Illinois agricultural economist. Schnitkey’s advice to growers: “Make a budget with $4.30 corn and $10 soybeans. Obviously, you have to get cash rents dropped less than that.”
Otherwise, farmers will have to walk away from land. In some cases, if the tenant and landlord agree on the numbers, they can move toward variable or flexible cash rent. “Set the base at a level that lets the tenant survive at current prices. If prices go up, the landowner can share in higher revenues,” Schnitkey advises.
Be ready to roll up your sleeves. What are the costs on a per-acre and per-bushel basis? If a lease isn’t covering cash costs, then the landowner must lower the dollar amount, the tenant and landlord must reach some sort of flex or the tenant walks. “That’s tough to think about and tougher to do,” says Allan Vyhnalek, educator at Nebraska Extension in Platte County.
Vyhnalek believes if a flex agreement can be reached, the parties must have a blunt discussion about their bottom line. The tenant must share yields and the budget for that piece of ground. Landlords prefer cash rent because it’s packaged without risk. Flex options will put risk on the landlord’s plate.
“If you’re looking at relatively stable yields over time, you flex more on price. If you’re looking at eastern Nebraska dryland or non-irrigated ground where yield questions are a big deal, you might want to flex on yield. You could also flex on price and yield,” Vyhnalek says.
Above all else, landlords fear losing money if corn jumps back to $6 to $7 or soybeans climb to $11 to $15 per bushel. “Market economics say an upswing is unlikely, but landlords don’t know that—and none of the rest of us does either,” Vyhnalek notes. “Setting up base rent at $3.50 corn, for example, or $9 soybeans and being willing to go up if prices go up is a good way to let the landlord capture any increase in crop prices.”
When all is said and done, farmers still want to acquire more land. If a farmer cedes ground, there’s very little chance of ever getting it back. For many operations, that means never returning to the number of acres they presently farm.
“Bottom line: These are the most difficult decisions for tenants,” Vyhnalek says. “There are more farmers willing to jump in and grab more land right now.”
High Hopes for Lower Rents
A recent survey by Farm Journal Media’s LandOwner newsletter found a majority of respondents expect their cash rents to go down in 2016.
More Land Moves into Landlords’ Hands
Roughly half of U.S. farmland is leased, but in the Midwest, particularly east of the Mississippi River, as much as 75% of farmland in many counties is leased. As families have left farming or made the proverbial move to the city, heirs have become absentee landlords. Percentages of rented farmland vary by state, related to land values, history and even culture.
91.5 million acres is slated for ownership transfer within the next five years
The percentage of leased land appears to be headed toward a further jump upward in the near future. In some areas of the eastern Corn Belt, it’ll be hard for the percentage to move up much because farmland is already 70% in the hands of absentee owners. In other Midwest states, ground was settled and farmed a generation later. Transference is literally a generation behind, so the rental percentage rates have more room to climb.
The natural progression of farm operations is to get larger to generate volume and efficiency. Farmers in Midwest states such as Nebraska are moving toward operating larger land spaces, most of which will be rented, according to Mike Walsten, editor of LandOwner newsletter. “In Iowa, 55% of land is rented; 56% is owned by someone over 65; and 20% is owned by someone who doesn’t live in the state. In Nebraska, that ground will turn over in the next 15 to 20 years, and 40% is owned by someone 70 years or older.”
Nebraska farmer and former Purdue University ag economist Brent Gloy expects the proportion of rented farmland to continue creeping upward as land changes hands in the next decade. The majority will transition to off-farm owners, but a portion will be bought by existing farm operations.
“We’ve seen a huge shift from shared leases to cash leases. That has the benefit for off-farm investors because they don’t have to worry about production,” Gloy says. “I think that trend has played out, and people are moving toward flexible cash leases, where the landowner takes some risk on the size of their rent check based on how a crop performs.”