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Serving: IA
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3 BIG THINGS: Major issues with cash rent leases this year are profitability, transparency of information, and trust between tenants and landlords.

Raising concerns with cash rent agreements

Farm financial success for 2020 starts with good communication with your landlords.

Financial pressures continue to mount on many Iowa farmers. Those feeling the greatest pressure tend to be tenant operators who’ve struggled to manage 2019 costs, potential yields and crop prices. Some want to make changes in their 2020 cash rental rate arrangement and have already approached the landlord requesting a lower cash rent. Others will wait until after harvest to renegotiate.

Iowa law specifies that if you want to terminate a farmland lease then you must serve notice to the other party in writing on or before Sept. 1. If the lease isn’t terminated by that deadline, the lease continues in effect for the next year. It can still be renegotiated, and the terms changed prior to March 1, if both parties agree on the changes. Iowa law sets March 1 as the date when farm leases go into effect each year unless another date is specified in a written lease.

A great deal of uncertainty regarding crop costs, yields and prices has caused some tenants to not terminate their leases by Sept. 1, 2019.

“We’ll see a lot more tenant operators wanting to renegotiate cash rental rates in January and February,” says Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. “Rather than approach their landlords now, these farmers are waiting to see if their lenders renew their farm operating loan for 2020. If the loan isn’t renewed, the tenant will ask the landlord for an even greater reduced rental rate.” 

Tenants, landlords need to talk

ISU Extension held 80 cropland leasing meetings across Iowa in July and August. Based on what they are hearing from tenants and landlords, the ISU Extension specialists think there will be more than the usual number of farmers who won’t get traditional financing for 2020.

Good communications between landlords and tenants remains critical in establishing a fair cash rental rate and providing desired farming and stewardship practices. Melissa O’Rourke, ISU farm management specialist in northeast Iowa, says communication has become more of a concern among landlords this year.

Discussions this fall and winter can add clarity to the written farm lease and include those practices, planted acres and yield histories. Many landlords would like to view the five-year history of planted acres and actual harvested yields on their rented land. FSA records usually exist for planted acreage on each farm. This winter, producers can use their actual production history for 2013 through 2017 crops to update their Price Loss Coverage (PLC Yield) as a part of USDA’s new ARC-PLC commodity farm program.

Cash rental rates for 2020

Low crop prices and tight or negative profit margins are prompting more tenants to look for ways to reduce crop costs, including renegotiating cash rental rates for 2020. Cash rent is typically the largest single cost for growing corn and soybeans in Iowa. However, in most cases you can expect cash rents to remain stable for next year, as demand for rented land typically far exceeds the supply.

Many farmers were able to market a portion of their old and new crop corn at profitable levels and should have money for cash rent payments. Also, the new Market Facilitation Program payments will cushion some of the lower cash prices farmers receive. MFP payments will likely be made to farmers again in 2020 if Chinese tariffs on U.S. ag products continue.

Most landlords are aware of the financial uncertainties their tenant operators face, according to Patrick Hatting, ISU farm management specialist in southwest Iowa. Those who attended the meetings received information to give them more confidence with lease negotiations and to recognize the need for regular conversations between tenants and landlords about farming and stewardship practices. Attendees also learned how to get planted acreage numbers from local FSA offices. The production evidence is the property of the tenant in most cash rent arrangements; thus, many landlords don’t see the actual production on their cash rented farms.

Don’t expect many Iowa landlords to be simply chasing higher rents for 2020. They asked questions about MFP payments and the importance of preharvest marketing 2019 crops at the leasing meetings.

Farmland stewardship important

Most landlords are placing more emphasis on stewardship practices and making sure they have a tenant who cares for the land and is focused on soil conservation and water quality, Hatting says. Fall is a good time for landlords to ask questions of tenants about these stewardship practices and observe them firsthand on rented farmland.

The 2017 ISU Farmland Ownership and Tenure survey indicated 20% of Iowa landlords would be willing to pay for a portion of the cost of planting cover crops on their land. Another 10% said they would be willing to lower rental rates for tenants who plant cover crops, and 5% would consider a longer cash lease for a tenant who plants cover crops. Adoption of cover crops has been slow as tenants struggle with low grain prices and tight profit margins. Landlords might provide momentum if that’s a strategy that both tenants and landlords agree upon.

Tenant-landlord relationships are critical, as more than half of Iowa’s cropland is rented. That’s not likely to change anytime soon because most Iowa farmland appears to be in strong hands and 82% is free of debt.

The ISU survey also found that 69% of Iowa farmland owners have no plans to sell their land anytime soon. Farmland has been a very attractive investment in the past decade, despite the setback in crop prices. Lower overall marginal tax brackets on federal income taxes are likely to make owning farmland even more attractive. Statewide, recent farmland value surveys indicate land prices are stabilizing after declining by 17% on average since their peak in 2013.

“The limited amount of land for sale is the reason farmland prices stabilized, even though farm income has declined sharply,” Johnson says. “I think we’ll see some additional land listed and auctioned this fall, primarily the result of settling estates. Cash rent prices in Iowa have also stabilized because of the tight supply of land available for rent. That trend is expected to continue in 2020.”

Summing up: Good communication among landlords and tenants will continue to be critical as tenants share more farm-related information such as final planted acres, final harvested yields, soil tests and stewardship information. Landlords will be reluctant to give up a good tenant that is a good steward of their farmland. Visit Iowa State University's Extension site for more information and decision tools for farmland leasing.

Improving landlord-tenant communications

Three key take-home messages from the series of cropland leasing meetings:

Landlords need to be open to learning about current farm-related issues, costs of production, market price risks and tenant operator financial challenges.

Tenants need to listen to interests and goals of landlords, and be willing to share information about conservation and production practices, crop inputs, yields and future cropping plans.

Each need to understand the challenges that both landlords and tenants face with continuation of tight crop profit margins.

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