Is It Time to Walk Away from Pricey Cash Rents?

 
Is It Time to Walk Away from Pricey Cash Rents?

The history behind this fertile ground goes much deeper than just the black dirt on the surface. To many farmers, each acre of rented or owned ground is a security blanket for the next generation of their family farm. Giving up that acre isn't an easy decision to make.

“None of us ever want to let a piece of ground go,” explains Matt Davis, Vice President  AgriBusiness, Farm Credit Mid-America. “You become attached to it. 

“They've worked hard to get a hold of a rental piece of property,” explains LandOwner Newsletter Editor Mike Walsten. “It may be located right across the fence line from their other properties. Farm operators just don't want to give that ground up.”

Walsten says the last time we saw a flood of farmers forced to walk away from land was in the farm crisis of the 1980s. He says this year it will be voluntary, instead of forced, and those instances may grab headlines, but won't hit the majority of agriculture. Those walking away from land doesn’t necessarily depend on the size  of the operation.

“If some of the rents have been pushed up aggressively over the last five years, that's an area where serious discussions are going to occur,” says Walsten. “Now whether or not they're going to be successful, that's a whole another issue.”

“A farmer that was only farming 500 acres and he grew to a 1,000 acres in the last two to three years, might feel this situation tougher than farms 10,000 acres and grew to 12,000,” adds Davis.

As commodity prices fall, conversations are getting tougher across rural America with some farmers positioned better than others to weather the storm.

“When you look across the board, we have some farmers who are in a really good financial situation,” says Mykel Taylor, Ag Economist at Kansas State University. “They've come out of these last several years with a low debt to asset ratio, and they're in a good financial position. Those will be the folks that will have an opportunity to pick up that ground. Folks who aren't in as good of a position, for whatever reason, those are the ones who are going to have to let it go.”

“It's going back to the old school playbook and looking at every line item trying to find an area to find somewhere to trim," says Davis.

Cash rents are stickier than owned ground, taking longer to retreat in price, but relief could be on the horizon.

In Iowa and Illinois, for instance, a survey out of Illinois suggests that they're going to be bringing their leases down 10 percent for 2016,” says Walsten.

That 10 percent isn't enough to save some farmers' bottom-line. University of Illinois economist Gary Schnitkey is scrutinizing the numbers, suggesting major cuts to annual expenses.

“Roughly, if we want to have revenue at the same level as cost, we would have to have cash rent acre costs cut by $100 per acre, just to be in the same ballpark and breaking even.”

His figures are based on Illinois figures of $800 of revenue per acre. On that same acre, he's figuring in $300 just in cash rent, with all other inputs adding up to $550.

Davis agrees farmers need to trim expenses, but just reducing land costs isn't going to be enough.

“Historically, land might be one-fourth to one-third of your expenditures for an acre of land,” says Davis. “So, you need to look at your whole budget and see if there are other areas you can trim, as well. It won't all come from the land itself.”

Davis says when considering walking away from rented ground, the decision needs to be based on more than just the face value of that rented acre.

“You need to consider the productivity of your land, its location to your headquarters or you base of operations, maybe other farms you’re currently farming in that area,” he says. “If it's lower productivity and far away, maybe if you had to pick something to give up, maybe it's one of those.”

Considering all of those factors is also why Taylor says don't be too quick to walk away.

“Economies of scale is this concept that the more land that you have, the better able you are to spread out your costs across that land, and the more land that you operate, the bigger you can get, potentially the more efficient you can get with your machinery and labor,” she explains.

An alternative to a straight cash lease in today's uncertain agriculture environment is opting for a flex lease.

“You can establish a base level of rent that’s in line with current commodity prices, while leaving the upside potential there if prices increase over the next year or the duration of that contract,” says Davis.

Walsten also thinks we could see more flex leases this year, but he says those agreements often require even more convincing on the farmer's part. Whether it’s switching to a flex lease, or negotiating with landlords on reducing cash lease prices, he says keeping an open flow of communication with the landlord is key.

“Start talking early,” advises Walsten. “Do not get emotional about it. Keep it very straight forward."

He says it's those straight forward conversations that can also mean a lifelong commitment to keeping a family's farming legacy alive. 

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Comments

 
Spell Check

Renter
jamestown, ND
10/5/2015 03:05 PM
 

  Cash rent certainly has to come down but the attention needs to be turned to seed and fertilizer prices also. Too much greed.

 
 
Ryan
Dike, IA
10/6/2015 12:05 PM
 

  I agree with Renter...why do we keep seeing these articles encourging producers to shaft their landlords, but nothing about seed and fert prices being left unchanged? I suppose landlords don't pay advertising fees?

 
 
delta88
Memphis, TN
10/6/2015 10:49 AM
 

  In the end the banker will call the shots. If operators want to burn throught their working capital they will let them. But when there is no cash in the current asset column; and rent is part of what is borrowed then the game changes. Rent cant be the only thing that drops. Inputs; tires; everything has to fall.

 
 

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