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When to pull the plug on sticky cash rentsWhen to pull the plug on sticky cash rents

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

Jacqui Fatka

December 26, 2017

2 Min Read

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.

About the Author(s)

Jacqui Fatka

Policy editor, Farm Futures

Jacqui Fatka grew up on a diversified livestock and grain farm in southwest Iowa and graduated from Iowa State University with a bachelor’s degree in journalism and mass communications, with a minor in agriculture education, in 2003. She’s been writing for agricultural audiences ever since. In college, she interned with Wallaces Farmer and cultivated her love of ag policy during an internship with the Iowa Pork Producers Association, working in Sen. Chuck Grassley’s Capitol Hill press office. In 2003, she started full time for Farm Progress companies’ state and regional publications as the e-content editor, and became Farm Futures’ policy editor in 2004. A few years later, she began covering grain and biofuels markets for the weekly newspaper Feedstuffs. As the current policy editor for Farm Progress, she covers the ongoing developments in ag policy, trade, regulations and court rulings. Fatka also serves as the interim executive secretary-treasurer for the North American Agricultural Journalists. She lives on a small acreage in central Ohio with her husband and three children.

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