On farm grain storage bins

Cash rental rates facing strong headwinds

Farm lenders are urging many of their borrowers to ask landlords to lower 2016 rent.

With another big crop likely to be harvested this fall, low corn and soybean prices are expected to continue in 2016. Profit margins for corn and soybean producers will continue to be tight. The situation is putting downward pressure on cash rental rates.

Many tenant operators can't justify paying the amount of cash rent per acre in 2016 they paid in 2015, says Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. If it is the same or similar to the high cash rental rates of 2015 and yields don't rise as other costs fall, the 2016 rate won't pencil out to a profit with low crop prices. Farm lenders are encouraging many of their borrowers to ask landlords to lower the 2016 rent.

Cash rent follows land values, which fell nearly 9% in 2014
Johnson and his ISU Extension farm management colleagues around Iowa are holding about 70 farmland leasing meetings during July and August. Talking to tenants, landlords and lenders attending the meetings, it's obvious cash rents will decline for 2016. Perhaps in the 10% to 12% range compared to 2013 average rents.

Average Iowa land values fell nearly 9% in 2014, and cash rent is highly correlated with land values. The downward pressure on cash rental rates isn't going to be even across the state or across the county, says Johnson. "But you are going to have to work with your landlords so they understand that your total cost of crop production is probably only going to decline 2% to 3% in 2016," he adds. "The cost of production will remain high, while crop prices have already dropped nearly 45% for corn and 35% for soybeans in three short years."

Crop revenue is the issue, now in 2015 and looking ahead
"It's crop revenue that becomes the issue, in 2015 and looking ahead to 2016," says Johnson. "It's yield times price minus costs."

Farmers aren't as heavily leveraged today as in the 1980s when the financial crisis struck. But there is concern that some farmers aren't going to have enough working capital to be able to cover their costs of production in 2016.

Working capital is current assets minus current liabilities. If you don't have money to pay second half cash rent for 2015, and will likely face even more pressure in 2016, you don't want to be spending your cash for other purposes. "You probably should be re-amortizing existing loans and cutting overall crop costs by maybe 5% to 10% for 2016," says Johnson, "and start with your farmland lease.

"Repayment capacity is also an issue for some farmers," he notes. "If you leveraged your farmland to buy additional land or if you expanded the amount of land you farm by renting more and buying machinery and equipment over the last three to five years, it's likely you'll have to consider re-amortizing those loans and stretching your principal payments out. Hopefully, you'll do this refinancing before we see interest rates rise."

Farm lease termination deadline is Sept. 1 in Iowa
The focus between now and Sept. 1 for tenants is, are you willing to accept the cash rental rates in 2016 that you had in 2015? If you don't renegotiate your lease now or notify your landlord legally in writing on or before Sept. 1 that you want to terminate your 2015 lease, you'll likely have the same cash rent in 2016 as you had in 2015.

The two parties can negotiate a change after the Sept. 1 termination deadline, but if they can't reach agreement, then the 2015 lease remains in effect.

Iowa Land Value & Cash Rental Rate Trends
CASH RENT: Statewide average cash rents fell nearly 4% for 2014 and over 5% in 2015. ISU economists look for a similar drop in 2016, based on current crop cost estimates. In total, that would be about a 12% decline from the record high average of $270 per acre in 2013.

"It's important that you get up to speed on what's going on with crop revenue, the pressure on working capital and cash rental rates for your farming operation," says Johnson. "We encourage farm operators to bring their landlords to our leasing meetings."

Surveys show rental rates have dropped 9% in past two years
USDA is forecasting net farm income in the U.S. is going to drop 32% in 2015. "There will be a lot of pressure on tenant operators from their lenders, to renegotiate their leases for lower cash rental rates in 2016," he notes. About 55% of the farmland in Iowa is leased, and many of those are cash rent leases.

Over the past two years, average cash rental rates in Iowa have dropped, according to ISU's annual survey. They declined from $270 per acre in 2013 to $260 in 2014. That's a drop of nearly 4%. From 2014 to 2015 it declined further, to $246 per acre, a drop of over 5%. Johnson looks for a similar drop in cash rental rates for 2016. Thus, over the period of 2013 to 2016, average cash rents statewide will likely decline at least 10% or 12% or more.

Look at your cash rent lease very carefully for 2016
"If you haven't adjusted your cash rent lease over the last few years, you should look at it carefully for 2016," Johnson advises. "There is going to be a lot of pressure to lower cash rents for 2016."

For information on cropland leasing and how to figure a fair cash rent, visit ISU's Ag Decision Maker site extension.iastate.edu/agdm. Also, contact the ISU Extension farm management specialist serving your county for help with specific questions.

Flexible farm lease agreements, are they a better bet?
Farmers are also asking about flexible cash rent leases. As an alternative to a fixed cash rental agreement, a flexible cash rental arrangement can serve both tenant operators and landlords well by sharing the risk and the reward.

"Fluctuating markets and uncertain yields make it difficult to arrive at a fair cash rental rate in advance of each crop year," says Alejandro Plastina, an ISU Extension economist. To address this problem, some owners and tenants use flexible lease agreements in which the final rental amount is not determined until after the crop is harvested. The final rental rate is based on actual prices that could have been received for the crop and/or yields attained minus total costs each year."

A recent survey shows flexible leases account for nearly 12% of all cash leases in Iowa, says Plastina. He cites three main advantages for using flexible leases.

Flexible leases have the following advantages:
• The final rent paid adjusts automatically as yields or prices fluctuate.

• More risks are shared between the owner and the tenant, as are profit opportunities.

• Owners are paid a base rent and possibly a flex payment. They don't have to be involved in decisions about crop inputs or grain marketing.

For a newly updated ISU publication, "Flexible Farm Lease Agreements", FM 1724 revised, visit ISU online store at store.extension.iastate.edu and download it. Or go to the ISU Ag Decision Maker website and you'll find it in AgDM file C2-21. An interactive spreadsheet to analyze flexible farm lease agreements is available with that file.

TAGS: Extension USDA
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