Worried about the tightening financial situation their farmer borrowers are experiencing, ag lenders are urging customers to take a hard look at crop production costs as they plan for 2019. Corn prices have slid to their lowest levels in several years, and soybean prices are their lowest in 10 years. Yet, the cost of production is stubbornly high — close to the days of $5 to $7 corn. Trouble is, now we have $7 beans, not $7 corn.
On many farms there’s no profit in growing corn and soybeans. Working capital and liquidity are evaporating; financial pressures are mounting. “We are working with our customers as we always have,” says Tim Koch, chief credit officer for Farm Credit Services of America. “Our message is to know your cost of production and where those costs are relative to current profit levels. Where the two are out of synch, look at where you can reduce costs.”
Costs include equipment, seed, fertilizer, chemicals, family living expenses, debt service and, in many cases, cash rent. The list is extensive. “We’re focused on helping producers get their cost of production more in line with the current commodity price environment,” Koch says.
Figure out finances
Leslie Miller, ag lender at Iowa State Savings bank in Knoxville and member of the Wallaces Farmer Timely Tips panel, urges farmers to analyze their records and look to 2019 to project potential costs and returns, and figure out how much they can afford to pay per acre for rent.
In some cases, lenders are encouraging farmers to meet with landlords and renegotiate for a lower cash rental rate to help make the crop enterprise cash-flow. In Iowa, it’s important to give written notice to landlords before Sept. 1, telling them you want to terminate your rental agreement.
Iowa law requires notification by either party, tenant or landlord before Sept. 1 to cancel a cropland lease. If notification isn’t served, the lease automatically renews on existing terms for the coming year. It’s possible to renegotiate your cash rental rate after Sept. 1, even if you don’t serve notice to terminate. But the landlord and tenant must agree to renegotiate, and in some cases, that isn’t likely to happen. Landlords often want to keep the high rental rate and hold the tenant to the current lease.
“Corn and soybean revenue looks to be down $100 per acre in the past month or so and is at 10-year lows. Cash rent near record highs is simply out of synch,” says Ben Riensche, who farms near Jesup in northeast Iowa.
“You wonder if it even makes sense to rent land now, unless you need to spread your fixed costs, such as machinery, over more acres. The current trend of low income and high cash rent is scary,” he says.
This situation is occurring even on well-managed, productive farms. “The financial losses are occurring despite having pretty good yields across the state,” notes Riensche, who’s been farming for 25 years. “We’ve had four bumper crops in a row. Farmers are going backward financially, not forward. Production costs are still high, and the cost that’s been adjusted the least is land, including cash rent rates.”
Spreading out fixed costs
While renting land doesn’t pencil out for many farmers, they do it to spread fixed costs, such as machinery payments, over more acres. But the clock is running out. Equipment is wearing out and more farmers are asking themselves, “Why replace it to farm more acres?”
It’s time to make some adjustments, Riensche says. “One of them will have to be cash rent for some farmers. Hopefully, the renegotiated rent can be fair to both parties, as landlords want to keep good tenants. This needs to be discussed, and the cropland lease needs to be terminated before the Sept. 1 deadline.”
With enough farmers feeling the continued financial pinch, many landlords for the first time in years are wondering if they will actually receive rent payments.
With interest rates inching up, more landlords are asking for all the rental payment to be made in advance, instead of half the annual rental paid up front and half paid after harvest. “I think what’s fair is half-and-half,” Riensche says. “If the landlord asks for all the rental payment up front and your interest rate is 7% and it was 4% two years ago, this becomes a much more substantial factor in your cash-flow situation.”
You can’t afford to prepay rent early. Profit margins have tightened and disappeared on many farms. Working capital is declining, and farm machinery is wearing out and needs to be replaced, he says. Where downward adjustment is needed on rent, taking it hardest on the chin will be the marginal-quality, less-productive land.
Technology plays into this. Some farmers are using unmanned aerial vehicles, or drones, to fly over fields and provide images showing higher- and lower-producing areas. There are farms where you ask, “Do I need to rent this farm cheaper? Or not at all? I’d be better off to put my capital into something else.”
Alternatives to cash rent lease
Flexible cash leases, as an alternative to straight cash rent, are recommended by more lenders. Most landlords will go along with a flex rent, which shares the risks as well as the rewards. But make sure the flex lease is written so it does more than just provide a bonus payment for the good times. It needs to flex both ways from the baseline rent, to work for the low-profit and no-profit years, too.
Crop-share leases are another option. They were popular years ago before cash rent came along, driven by highly competitive demand for rented cropland. Landlords were able to ask for and receive a simple cash payment instead of having to participate in the challenges of crop production and marketing. Crop share can still work, if you can get the landlord to go along with it, says Riensche, who has a crop share lease with one of his landlords.
Readers have been asking if a cropland lease termination notice is served on, instead of before, Sept. 1, if it’s too late for the termination notice to be effective.
Kristine Tidgren, attorney and director of the Center for Ag Law and Taxation at Iowa State University, says if you send the notice via certified mail, the date of mailing (not date received) must be before Sept. 1. If you hand-deliver and have the other party sign for it, you can do that on Sept. 1.