What to Know Before Negotiating 2018 Cash Rents

October 12, 2017 04:23 AM
 
2017 Cropland Cash Rents and Change from 2016

For 2017, the national average for cropland cash rents is $136 per acre, which shows no change from the 2016 national average, according to USDA’s 2017 Cash Rents Survey. But it does show a retracement from 2015, when the average cash rent peaked at $144 per acre.

California boasts the highest per-acre cropland cash rent at $325, followed by Hawaii with $282 and Arizona at $250. For the Corn Belt, Iowa leads the pack with an average cash rent of $231, followed by Illinois at $218.

On the other end of the spectrum, Montana has the lowest average cropland cash rent of $31.50. South Carolina, West Virginia, Texas and Oklahoma also have average cropland cash rent below $50 per acre.

Pressure on Rents. The USDA data for cash rents mirrors the trends recorded by other farmland value and cash rent reports from universities and land management companies.

“There’s downward pressure on cash rent because farm profit has shrunk so dramatically,” says Andrew Swenson, North Dakota State University Extension farm management specialist.

The cost of production for major row crops in North Dakota doubled in less than a decade and peaked in 2013, he says. From 2013 through 2016, the per-acre cost of production dropped, but only by around 10% to 14% for most farmers.

“Costs aren’t adjusting as fast as revenues have collapsed,” Swenson explains.

Despite the tough financial conditions, North Dakota farmers harvested tremendous corn and soybean crops last year. Record-breaking yields and strong government payments, propped up net farm income for the state’s farmers, Swenson says. “Last year, we really dodged a bullet. If we would have had mediocre yields in 2016, it really would have been really tough on producers.”

The decline in cash rents across the country is also a sign that farmers have been renegotiating cash rents for the past two to three years to mirror the drop in farm income, says Alejandro Plastina, Iowa State University (ISU) Extension economist.

Understanding the true financial picture for your tenant will be vital in 2018 cash rent discussions.

“Landowners should stay informed of the ag sector situation,” Plastina says. “Although we’re seeing a decline in cash rents, land values are holding steady in Iowa or increasing. That can be mistakenly interpreted as an improvement in the ag sector, but that’s not the case at all.”

Also, know the productivity of your land, Swenson advises. If you don’t consistently receive production information, request it from your tenant. Different quality categories of land are seeing varying swings in cash rents.

“The land rents that didn’t increase much during high-price crop years are holding, but some of the rents that got very high have come down,” he says. “Landowners with marginal land risk larger percentage drops in cash rent. In periods of a financial crunch, operators are more willing to walk away from marginal land.”

Because most landowners want continuity in a tenant, look at how he or she is managing the property and weigh the challenges of finding a new tenant, Swenson adds.

Plastina agrees. “Don’t just focus on the cash number. Know what your tenant is doing to improve the soil on your farm by providing conservation practices, repairing erosion damage, etc.”

Time to Talk. To be informed for your cash rent negotiations, Plastina encourages you to regularly communicate with your tenant. “If both parties can communicate more often, it facilitates a discussion for negotiating cash rents,” he says. “Better communication equals better trust.”

For landowners who have been removed from the agricultural sector, knowing the right questions to ask can be difficult. To help cope with this challenge, ISU has a developed a “Farmland Lease Annual Report,” which is a guide for sharing crop information for farmland rental agreements and to aid in communication. It provides a framework to use. 

 

Want more farmland news? Subscribe to LandOwner Newsletter, a must-have resource for both farmers and landlords.

 

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