With COVID-19 adding uncertainty in the farm economy and lower crop prices, should I re-evaluate my cropland leasing strategy? I’m contemplating the need to terminate my four farm leases this summer. Farming in central Iowa, I’m paying $230 per acre cash rent in 2020. ISU’s annual survey reports $232 per acre as the average cash rent for central Iowa this year. I need to notify my landlords before Sept. 1 if I want to terminate, or the leases will automatically renew for 2021. Will poor economic conditions continue and put down pressure on cash rents for 2021? Or will government aid such as the Coronavirus Food Assistance Program cushion the blow? With the government aid, maybe another farmer will be willing to pay $230 an acre to farm the land if I’m not. Should I terminate my leases and offer my landlords a lower rate for 2021?
Stout: You are paying about average for your area of the state for cash rent. If the land you rent is average or better quality, then you aren’t likely to get a lower rent, unless you are doing something to improve the land beyond what is normally expected. Looking at the past four years, the average rent in your area was $228, $237, $231 and $232 this year. So even though prices for commodities have come down, rent hasn’t changed much, although they seem like they should. The CFAP payment will make up for some of the loss, and a potential Price Loss Coverage payment will also help on the income side. You could ask your landlords if they would be willing to lower the rent, but sending them termination letters comes with the risk of losing the chance to rent up to four farms.
Plastina: Reevaluating your leasing strategy annually is a great way to put things in perspective. It forces you to ask the hard questions: How much money will you make in this farm? What are your costs per farm? How does your cash flow look without that farm? How much can you withdraw for family living expenses if you keep the rented farm versus dropping it? Based on market fundamentals and futures prices, it seems unlikely that corn and soybean prices can rebound in 2021. The question becomes whether government aid can offset a stagnant or declining crop revenue.
Although the federal government has shown strong intentions to compensate farmers for damages caused by trade tensions, flooding and the coronavirus pandemic through increased flexibility in Agriculture Risk Coverage, PLC and new programs like the Market Facilitation Program, Wildfires and Hurricane Indemnity Program Plus, Paycheck Protection Program and CFAP, chances are support for new or expanded programs would wind down after the election in the face of growing public debt concerns.
If a rented farm wasn’t able to generate profits over the past three years, chances are it will not be profitable in 2021. In that case, it seems reasonable to contact your landlord to let him or her know about the practices you put in place to take good care of the land, and that you would not be able to lease it at the same rate going forward to start a renegotiation process. Starting this conversation in the summer will give you plenty of time to send a termination notice by Sept. 1 if the renegotiation does not prosper.
Without formal termination notice delivered by Sept. 1, the current lease will auto-renew for a year. Whether other farmers are able to afford the farm you are currently renting should be a minor concern to you if the farm does not add profits or cash flow to your whole farm operation. Iowa State University Extension provides guidance on how to improve communication between tenants and landowners through multiple articles.
Miller: If a rented farm is losing money, you should not hesitate to sit down with your landlord and talk about the lease. Frequently, the landlord thinks about the best-yielding ground on a farm, not the whole farm average. It may help to bring a soil map and crop insurance records to back up your discussion points regarding yields and poor-performing areas of the farm.
The current environment provides a great opportunity to see if you can persuade a landlord to look at a simple flexible lease — or variable cash rent lease. This type of lease provides a landlord with a guaranteed minimum amount of rent (usually less than what you are currently paying), but the maximum amount of rent is based on 25% to 35% of actual total proceeds. The proceeds are calculated using the actual yield times the local elevator price on a specific date or dates. Some leases provide for the inclusion of government payments in that calculation. This lease would allow the landlord to get a higher rent if prices would turn around or yields would be exceptional. It can also keep the tenant from going out of business if yields or prices are bad. Most landlords, if specifically asked, would have to say they don’t want their renter to go out of business because of their farm.
Determine bid cap before land auction
A 160-acre tract half a mile away from a farm I own will sell next month. It’s average land, 150 tillable acres. When I found out earlier this year that it would be sold, I was thinking $7,000 per acre. I’ve heard a neighbor is willing to pay up to $9,000 an acre. I’m in a decent capital position and could swing it, but what does that look like for a long-term investment? The land between it and mine is in an estate and could sell in the future.
Zhang: The bid cap at land auction reflects your individual willingness to pay for the parcel, which could be different from the so-called market price, but should not be far off. ISU Ag Decision Maker information file C2-76 and C2-77 provide general discussions and factors to consider when evaluating the economic and financial aspects of a land purchase. In particular, C2-76 shows how you could use the net cash rent this parcel could generate to infer how much it is worth. An examination of recent sales of comparable parcels in your area will also give you some clues about the ranges for what folks are actually paying for similar parcels. I understand that the location premium could increase your bid cap somewhat, especially given farmland is typically held by the same owner for more than 20 years. That said, in this extremely uncertain time, it’s also important to evaluate how the bid, especially a much higher bid price, would impact your working capital and financial ratios.
Stout: Farmland has been a good long-term investment, mostly based on the appreciation in value over time. Yearly returns have been in the 2% to 3% range in recent years, but appreciation in value has added to that return. Talk it over with your lender and make cash flow estimates based on adding this parcel to your existing farm. If you can swing it, get a price in mind you are willing to pay, and your lender is willing to back, and stick with it if it sells at auction. Location is important with this farm since it fits in well with your operation, so it may be more valuable to you than others at the auction.
Miller: At $9,000 per acre and 4% interest, over 25 years, your annual payment per acre is $576 — and that is assuming you borrow 100% and it is 100% tillable. If there are only 150 acres tillable out of the 160, that amount becomes $614 per tillable acre. Taxes and insurance will add to that cost. Continuing with the 150 acres tillable out of 160 acres example: If we assume this land could generate enough net income to pay $250 toward the payment plus taxes and insurance, that still leaves $364 per acre that has to be subsidized somewhere else. In total, that would be $54,600 from the rest of your operation (150 × $364). If you are farming 1,500 acres now, that $54,600 is an added cost of $36.40 on every other acre — which may, or may not, be a problem for you.
Whenever you subsidize the purchase of a new parcel of land, it can soak up money that you would normally use for living expenses, machinery replacement or property improvements. Sometimes we trick ourselves into thinking land is more affordable by using working capital to minimize the amount of debt we take on with the new purchase. For example, if you only borrowed $4,500 per acre, the payments would be $307 per acre on 150 acres. This does not seem nearly as bad. However, if you are borrowing more operating money because you used working capital to help with the purchase, you need to consider the extra interest you will pay for that money. You could add $128 per tillable acre on the new ground if you increased your operating money borrowings, for as little as eight months, by the $720,000 it would take to cover half the cost of the land.