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Corn+Soybean Digest

Cash Rent Crisis

Competition for land, tight crop production budgets, and even wild rumors can add to the air of uneasiness when it comes time to negotiate cash rent lease renewals. But by knowing your personal and financial limits and being willing to get creative, you can secure a sound lease or learn to be satisfied to walk away during these cash-tough times.

“Budgets suggest that 2006 cash rents should be lower than in previous years. We should expect less aggressive leases with higher energy and variable input costs,” says Gary Schnitkey, University of Illinois farm management specialist. “But the reality is that lowering rents goes against the trend. We may see rents rise again or just hold steady.”

The increasingly competitive nature of lease negotiations limits the interest of farmers in speaking publicly about the issues surrounding cash rents. But one Iowa grower who has worked with a number of different landlords says it's definitely getting harder to make a profit at today's rental rates. He has seen cash rents of $170-180/acre, and he doesn't expect those to come down unless farm payments are pulled from 2007 farm legislation.

“Sometimes you have to turn it down. As hard as it is to walk away, we've learned it has to be breakeven or better or we pass it up,” he says. “You hate to do it because someone else will pick it up, even if they can't make money, just to control the land.”

Take a hard look at the numbers. According to Illinois Farm Business Farm Management (FBFM) data, average cash rents in Illinois alone have increased about $3/acre/year since 2000. But farmland within a narrow geographical area may have rents that vary more than $75/acre.

Schnitkey says a survey released by the Illinois Society of Farm Managers and Rural Appraisers in 2005 analyzed cash rents at the upper end of the market. According to the data, average cash rents for highly productive farms averaged $164 in 2004, but cash leases in the top one-third of the range averaged a much higher $192/acre.

While farmers paying rents in the high end of the range in Illinois may have made money at those levels in 2003 and 2004, Schnitkey says remaining profitable will be more difficult. Operator and farmland returns are projected at $148/acre for 2006, which means farmers paying more than $148 for cash rent will lose money. A likely scenario, Schnitkey adds, given that variable costs for Illinois corn and soybean production have risen more during 2002-2005 than during any other time since 1980.

“We pay cash rents in the range of $130-160/acre, which I believe is fair, but on the low end around here,” notes another Iowa farmer. “I've had cash rents raised based on false rumors of what a landowner's neighbor is paying, rather than on agronomics. Every farm is different, but you have to consider the economics to determine the rent.”

Now is the time to get creative with your options, however. Growers facing tough rent situations in 2006 can consider a number of options to try and ease future financial stress, says Moe Russell, Russell Consulting Group, Panora, IA. He recommends growers pencil out production costs and crop rotation adjustments.

He also suggests looking at creative leases. “Growers may want to negotiate three-year vs. one-year leases where possible. If you can stagger your acres on lease, you aren't negotiating all of your leases every year,” he explains. “Such a strategy could help stabilize your rent and provide some assurance that you won't lose any of those acres.”

Schnitkey also encourages farmers not to be afraid to approach landlords with budgets that outline all variable and equipment costs and profits. “Share the facts of what you have made in the past. Ask for a fair, positive return, around $20-40/acre,” he says.

Equally important to a return, adds one Iowa farmer, is relationships with landlords. “When we look at a farm, we look at how it has been farmed. We want a landlord that takes care of the farm and makes improvements,” he says. “We want a long-term relationship with people who care about the farm, not with off-farm landlords whose only interest is in getting the most money. It's hard to put a price on that.”

Negotiate With Fact, Not Emotion

Gary Hachfeld, University of Minnesota Extension educator, encourages farmers to try and negotiate a reduction in cash rent during difficult financial times.

“The reality is that this is very difficult, if not impossible. Just keeping rent the same is a challenge,” he says. “If financial times are difficult — and the situation may continue for a couple of years — it may be in your best interest to give up the rented land, although it may not be possible to get the land back in the future. You have to weigh all the issues.”

Hachfeld advises growers to use these points to negotiate a reduction or status quo:

  • Crop Returns — Potential net returns from crop production should be considered, especially given the recent rise in fuel costs. Sharing records can help your landlord understand your crop return position.

  • Land Quality — Know the soil types and the production capabilities. Crop Equivalency Ratings (CER values) can be a good indicator of land quality.

  • Tile And Drainage — Document drainage capabilities and the condition of the existing tile, and know if the farm includes wetlands or highly erodible land.

  • Farm Program — Any government program provisions can affect future cash rent values, both positively and negatively.

  • Previous Crops, Herbicides And Fertility — Cropping history and past herbicide use can limit crop options in the coming year. Farms with high soil test levels for phosphorus and potassium will require less fertilizer and have more rental value.

  • Payment Dates — If 100% of your rent payment is due in the spring rather than split between spring and fall, the actual rent paid could be higher than the negotiated price. If you borrow money to pay rent, you'll have additional interest.

  • Payment On Tillable Acres — Most rental contract payments are based on tillable acres, but some contracts base payment on total acres.

  • Previous History — Your working relationship and previous experience with a landlord can be an important factor in determining final cash rental rates. How well you take care of the land is an important negotiating factor.

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