After several years of record land sales and rising rents, we are seeing that even these must flex with economic realities.

For many producers, the time is now to discuss leases with landowners. But current trends in farm leasing cause this to be a challenging task due to the following factors:

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.

Cash rent lag effect. It’s human nature that none of us want our income levels to go down, which is why land rents are slow to adjust during downcycles in the ag economy.

They’re also slow to adjust due to 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 lag effect can be difficult to manage. 

Swings in farm income create winners and losers when it comes to establishing a fair rent.

Related:Hook up the grain trucks!

For example, in 2013, the tenant was the winner since the rent was likely set in 2011 or 2012 when income levels were lower. But in 2016, the landowner won since rents were likely set in 2013 or 2014 when income levels were record high. 

This is an example of a rental rate reduced from a fixed rate of $300 per acre to a variable cash rent arrangement with a $225 guaranteed base rent. In return, if prices recover or the farm profits from strong yields, the rent will flex higher as the tenant’s profit moves higher. In certain cases, the landowner’s rent may exceed previous levels. A lease that can ebb and flow with the market reduces some of the lag effect.

Market awareness. A 2023 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 media conference for the survey results was quoted as saying: “You can’t assume landowners know what you’re talking about.”

Even my own mom, who farmed with my dad for 35 years, admits she doesn’t follow the 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.

Why lower rents?

Lower grain prices and high production expenses undoubtedly 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. But on my small farm in eastern Iowa, I cannot pencil how even a record 300-bushel-per-acre corn crop will fully offset the drop in corn price from a year ago.

Related:Can the corn rally go higher?

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 the ups and downs in the market, and recent surveys indicate weakening land prices.

Current trends in farm leasing make it hard to establish a fair rental price from one year to the next. That said, a little preparation can go a long way toward making those conversations productive. 

Talking points

Consider these seven tips for smoothing that talk with landowners:

Do your homework. These are not the type of meetings to go into without a plan. Prepare data and trends occurring in the industry and on the farm. Most landowners appreciate seeing actual data from their farm
and surrounding farms. 

Understand landlord’s perspective. Recognize what is most important to the landowner, as each may have different priorities beyond just rent. Receiving a fair income may be important, but there may be other factors. Contrary to perception, the “next generation” is not always all about the money.

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Offer value. Illustrate any new farming practices that improve the farm, increase yields and reduce expenses. Many landowners may not be aware of the costs of new technologies that indirectly benefit them. Are there other ways you can provide value such as assisting in capital improvement projects?

Discuss market conditions. Use data and trends from third-party sources. Many of us have short memories, so it’s
a good practice to remind ourselves of how much things have changed in just a few short years.

Rents generally declined 20% to 25% after the 2013 peak in farm income and gradually rose again as income rose in 2021 and 2022.

Show your commitment. Reiterate the desire for a long-term relationship, and acknowledge how difficult it can be to determine a fair rental price when there is such volatility in the marketplace from unforeseen factors of weather, trade and global influences. 

Present multiple options. Any good negotiation includes offering more than one option. One I’ve had success with, as a follow-up to verbalizing your willingness to offer a fair price, is showing them a process to do so. The chart on Page 22 offers an example of a variable cash rent lease, which is a good tool to manage land costs, regardless of whether prices are high or low.

Build trust. In my experience, every strong landowner-tenant relationship includes open transparency and consistent communication. This will reduce surprises — such as requests for a rent reduction — and will build empathy.