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When to pull the plug on sticky cash rents

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Would you be better off financially without some high-rent farms?

National cash rent for cropland remained stable in 2017 for producers, but locally many are starting to feel the squeeze from cash rents that are slow or unwilling to come down.

Gary Schnitkey, University of Illinois agricultural economist, says it may be time to take a closer look at whether now is the time to walk away from higher cash rents as costs per acre hover around breakevens.

“Farmers have a difficult time showing positive cash flow, particularly if they rent a lot of land and are cash flow short,” Schnitkey says.

Farms have eroding wealth, but remain financially strong. Most can maintain higher cash rent prices, but they can only sustain it for the next two to three years.

Farmers also are often reluctant to walk away from land with the constant mentality to keep growing the land base. Most farmers have the equipment to farm 500 more acres with their existing fleet. “They know they’ve got to get bigger at the same time cash rents are not coming down,” he notes.

Some farmers have 90% of their land base cash-rented at high rental rates, and there aren’t many alternatives for them.

However, Schnitkey says for people who have working capital and 30% of their land base owned at low debt levels, they may have the power to walk away from one or two of their high-cash-rent farms.

“They could actually lose those farms and be better off financially,” Schnitkey states.

Property taxes

Farmers have indicated landlords are unwilling to adjust cash rents as property taxes restrain landowners from adjusting rents lower.

In Illinois, for example, between 2008 and 2016, property taxes increased at a rapid rate, from $24 per acre in 2008 to $53 per acre in 2016. During this eight-year period, property taxes increased an average of 9.6% per year.

Schnitkey says the most immediate impact of higher property taxes is a reduction of returns to farmland owners. “Since farmland returns began to decline since 2013, property tax increases magnify farmland return decreases,” he says.

Property tax increases negatively impact returns to farmland owners. Now returns received from farming the land also are decreasing. Landowners with share rent or variable cash lease arrangements already have had their returns adjusted downward.

“Cash rents likely will continue to decline in the future. The increase in property taxes makes the adjustment downward in cash rents more difficult,” he concludes.

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