By law in Iowa, if either tenants or landlords want to terminate or change the terms of a farmland lease, they must notify the other party by Sept. 1, or the current lease will stay in effect for the coming year. Driven by continued tight margins and uncertain yield and crop price prospects, more farmers in 2019 are being advised by lenders to serve notice and renegotiate with landlords for a lower cash rent in 2020.
For that reason and others, interest in renegotiating rental agreements is increasing. Providing answers and information on cropland leasing, Iowa State University Extension is holding 80 meetings statewide in July and August. Go online for dates and locations.
Most often the best policy for both the landowner and tenant is to comply with the lease termination provisions of the Iowa code and deliver the notice in writing on or before the Sept. 1 deadline.
ISU conducts a statewide cash rent survey each spring. Compared to 2018, results for 2019 show cash rent has declined 1.3% on average for Iowa, to $219 an acre. Cash rent is highly correlated to land values. Iowa land values peaked in 2013, as did cash rent and farm income. Land values based on ISU survey data have declined 16.6% in the last six years. Cash rent has declined 18.8% during that same period.
Evaluate lessons learned in 2019
Land values are a predictor of cash rental rates. However, other factors also affect rents, notes Steve Johnson, an ISU Extension farm management specialist. Those include drainage improvements, as well as cover crop and other conservation expenses. 2019’s wet spring caused late planting and decreased yields, which will drive some downward adjustment in cash rent. Rents will decline in areas that have had drainage issues this year and affect the overall state average cash rent.
Cropland rental agreements are based on relationships between landlords and tenants. Stewardship and communication are key considerations. “If you want a lower cash rent, you’d better be a good steward of the soil and a good communicator, and listen to what the landlord needs,” Johnson says.
Tenants and landlords should evaluate the lessons learned. “We didn’t have enough drainage in many fields with all the rain this spring and ended up with drowned-out areas,” he notes. “We are getting wetter springs in recent years; rain events are tending to be larger. We were tested in 2019 with more rain in shorter periods of time. Drainage is a topic of discussion between landlords and tenants for lease agreements.”
The ISU leasing meetings are also discussing provisions of the new farm bill and USDA’s Market Facilitation Program payments. But the underlying issue in many cases is improved communications between tenant and landlord, and the importance of land stewardship.
Should you change your lease?
Looking ahead, what should landlords and tenants prepare for? The big uncertainties are 2019 yields and prices. Are you going to leave your lease the same? Do you want to put stipulations in your lease for stewardship and weed control, for example? Are you going to adjust the cash rent? Remember, as a guideline, cash rent is typically about 3% of the farmland value, on average, statewide.
Tips, videos and additional information about leasing cropland are on ISU’s Ag Decision Maker website. “Farmland leases in Iowa run March 1 to the following March 1, and Sept. 1 is the notification deadline. You need to serve the termination notice in writing,” Johnson says.
Over 50% of the farmland in Iowa is rented, and most renters don’t want to lose ground in 2020. There will be some early negotiating about changes in rent, and both parties can come back in the winter before March 1 and make changes in their lease. But you must give notification prior to Sept. 1 if you want to terminate the current lease and make changes.
ISU has a 100-page reference called “Farm Leasing Arrangements.” Go online to bit.ly/farm-leasing-arrangements for leasing information and the various kinds of leases you can set up. ISU also has eight area Extension farm management specialists to answer questions.
“Landlords need to figure out what they should charge for cash rent in 2020, and tenants need to figure out what they can afford to pay,” Johnson says.
More interest in flex leases
Mike Downey, a farm transition and lease consultant with Next Gen Ag Advocates at Lisbon in eastern Iowa, foresees terms changing more in leases for 2020.
In working with clients, and helping landlords and tenants restructure leases, he says they are discussing changes needed in rental rates and arrangements. “At Next Gen, we are big fans of flexible cash leases. They provide a way for landlords and tenants to share both the risk and the rewards. Once established, a flex lease decreases the need to renegotiate year to year.”
Downey shows landlords how a flex lease can be used to handle the profit uncertainty in farming today. “The flex lease is a good tool to use,” he says. “We prefer to meet with the tenant and landlord together. Sometimes a tenant doesn’t feel comfortable having these conversations with their landlord. Bringing in a third party they trust is more of an unbiased way of showing a landowner the various ‘what-ifs’ of the farming situation.”
For example, if the average price for corn is $4 and you raise 220 bushels per acre, the rent with the flex lease may be over $300 per acre. If you have a poor year, the base the landlord would receive is lower but minimizes losses for the tenant. A flex lease leaves an upside for the landlord to share in the profit if the tenant is having a good year. The farmer would share part of every dollar of profit above the base level. For corn, the farmer could share 30% of the profit with the landowner.
“The flex lease is a good tool to adjust the rent downward when the farm economy is poor and yet still shows a landowner a structure that if crop prices improve, the landowner has an upside open,” Downey notes. “The biggest challenge we see with a lot of the standard cash rent agreements today is where to set a fair cash rent in an always changing market.”
Not too many farmers have had to renegotiate leases, until now. They’ve been getting good yields the past few years with low prices and have kept the rent the same for another year.
“But that situation is changing,” Downey says. “It’s harder to bushel your way through in a year when both yields and prices are down. For more information on farm leasing and for locations and dates for our upcoming workshops, we invite people to visit our website at nextgenag.us.”