Editor’s Note: This is the first of a two-part series.

After several years of record land sales and rising rents, we are seeing that even these are subject to downturns in the ag economy and the truth of an old adage: “What goes up must come down.”

For many producers, the time is now to discuss leases with landowners. Current trends in farm leasing cause this to be a challenging task.

What are the challenges?

Strong demand. Demand is high for land access and opportunities to rent new farms are limited, which makes it difficult to grow and expand. Some operations are more willing or able to subsidize such opportunities even if they don’t pencil very well. Along with this is the fear of losing a farm if rent negotiations don’t go well as there is likely be a competing farmer eager to step in at a moment’s notice.

Cash rent lag effect. It’s human nature that none of us want our income levels to go down, which is why land rents in general are slow to adjust during downcycles in the ag economy. The other reason they are slow to adjust is the timing for when cash rent rates are set.

In a perfect world, rents would be set after harvest when the yield and price of the crop are known. However, in most cases the industry standard is that rent amounts are established before the crop is even planted, so they are based more on previous results rather than the crop year when the actual lease is established. This causes a lag effect which can be difficult to manage. 

The illustration below shows this lag effect after the peak in farm income of 2013. The market is seeing this same behavior from our recent peak in 2021 to 2022.

Chart source: Rabobank

The illustration above shows the behavior during a typical row crop cycle. These income swings cause winners and losers when it comes to establishing a fair rent. In 2013, the tenant was the winner since the rent was likely set in 2011 or 2012 when income levels were lower. In 2016, the landowner was the winner since rents were likely set in 2013 or 2014 when income levels were record high.  

Market awareness. Last year, a survey of landowners showed they are becoming more disconnected from agriculture and less aware of what’s occurring in the industry. A speaker at the press conference for the survey results was quoted as saying: “You can’t assume landowners know what you’re talking about.”

I can relate. Even my own mom, who farmed with my dad for 35 years, admits she doesn’t follow these trends anymore. Yet, she knows exactly how much her property taxes have risen. Keep in mind landowners may not relate to the effect of $4 corn today versus $5 corn a year ago. However, most people respond to good visuals such as this chart showing the returns for a typical high-producing farm in central Illinois:

Chart source: University of Illinois farmdoc

This chart shows why negotiating rents can be difficult when you quickly move from years of strong income in 2021 and 2022 to consecutive years of negative income projections. In fact, 2023 and 2024 are estimated to be the quickest two-year decline of income in history.

Why lower rent prices?

There is no doubt lower grain prices and high production expenses have had a dramatic effect on income projections. Landowners may hear of record yield projections this fall from a bumper crop in some areas of the I-states. However, on my personal farm in eastern Iowa I cannot pencil how even a record 300-bu/acre corn crop will fully offset the drop in corn price from a year ago.

This not only affects farmers. We’ve seen ripple effects across the industry as several equipment manufacturers and other ag businesses laid off employees. Many farmers can’t afford to subsidize farm rents as they’ve watched their working capital erode and are forced to make cash rent decisions based on what the economics will support.

For owners of farmland, it’s important to recognize these cycles are nothing new. Don’t panic. Farming is a cyclical business, and land rents tend to follow land values. Even though land values have historically appreciated in value, they are still subject to these ups and downs in the market and recent surveys indicate weakening land prices.

The chart below illustrates these cycles comparing the price of corn versus its cost of production over the last 50 years.

Chart source: Iowa State University Extension

As you can see, the farm leasing business is not as easy as it once was when farmers and landowners simply split the income and expenses 50-50. In part two of this series, I will share some practical tips for how to prepare for these awkward and sometimes contentious land rent conversations.

Downey has been consulting with farmers, landowners and their advisors for nearly 25 years. He is a farm business coach and transition consultant with UnCommon Farms. Reach Mike at [email protected].