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Five strategies to help work out of agriculture's cash rent conundrum

Five strategies to help work out of agriculture's cash rent conundrum

These approaches could help work out of the budget squeeze fueled by high cash rents.

Grain farmers in the most competitive areas need to have a multi-year strategy for the distinct possibility of long-term markets of sub $4 per bushel corn and sub $9 per bushel soybeans.  It may be the only solution to the ‘blinking game’ many farmers now find themselves in. Many are waiting for someone else to blink before they do and begin giving up high cash-rent farms, or back off on rent.

It may make sense in the short-run to bid up rents far above what is profitable if that means keeping control of the land in case corn comes back up to $5 per bushel in one to three years.  But realize it’s a gamble, and one that the market odds aren’t currently favoring. 

SELL IT NOW? One strategy to remain solvent long term is to sell off machinery you bought but could live without it, before the used machinery market collapses.

It may also make sense in the short-run to pay rents that aren’t profitable so that you have that land if rents come down to reasonable levels in one to three years.  But realize that you are still playing the ‘blinking game.’ 

Related: Why is Greg Halich qualified to talk about cash rent and tough times in agriculture?

If no one blinks for three years and all your cash reserves and liquidity are drained in that time period, will you be better off?  That is a question that grain farmers will need to assess carefully and have a contingency plan for if they try to ride it out.

Here are five strategies that could help you as an individual farmer weather the storm in the long run.

1. Assess all rented farms and identify those with the highest projected losses. 

If you need to walk away from any of your leases, start here.  To do this you’ll need to have good cost and production estimates on those individual farms.  You can use enterprise budgets from various universities to help structure this process. Check out this one from the University of Kentucky

2. Know at what point, both in time and/or in red ink, you need to walk away from a farm and let someone else have it. 

If you do walk away, do so respectfully.  Chances are if the next farmer pays a rent that you know isn’t sustainable, he may not be on that farm in a few years.  If you left on good terms, there’s a good chance you’ll get the first call from that landowner when they’re looking for a new tenant.

3. If you feel you have to pay the current rental rate or something close to it, consider renegotiating the terms of the lease for one year. 

This will buy you another year of control, at a cost, and allows you to reassess the situation a year later. 

4. Consider negotiating a flexible cash lease with landowners.

Start with ones that are willing to share part of the revenue risk.  This means that you would have a base lease that is below the current cash lease, but where the landowner would get a bonus if revenue is higher than your current predictions.  Yes, this will mean that if we return to $5 per bushel corn, you will pay more rent than an equivalent cash lease.  But if the market stays at $3.75 per bushel corn, it may buy you a few years of liquidity.  

Related: How long can you play the cash rent 'blinking game'?

5. Assess your machinery needs. 

The majority of grain farms probably have more equipment today than they need for the acres they’re covering.  As hard as it may be to sell off a piece of machinery that would have brought 20% more a year ago, it still may be a good choice. Since you may have written it off with a Section 179 depreciation allowance, you would need to pay capital gains taxes.  Discuss with your tax adviser to understand your options.  Some farmers have done this for cash flow purposes in the last six months.  As much as large used machinery has dropped in price in the last year, you need to be realistic about the market for it in two to three years.  Who will be buying it?  If the market stays at or near $3.75 per bushel corn, chances are the market for that machinery will not improve. It may continue dropping.

- Halich is an Associate Extension Professor in Farm Management Economics at the University of Kentucky

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