Some farmers will need to renegotiate cash rents for 2015. Corn and soybean prices are being driven lower by big crops anticipated to be harvested this fall. While yield prospects look good, returns for the 2014 crop will be significantly lower than the past several years. "You can't support high cash rents on $3.20 corn and $10 soybeans," points out Steve Johnson, an Iowa State University Extension farm management specialist.
Cropland returns in 2013 weren't as high as returns from 2010 through 2012, and returns in 2014 and 2015 aren't expected to be that high, either. "It's time to consider negotiating cash rents lower for next year," says Johnson. "I think Iowa land values have peaked in 2013 and I think cash rental rates will come down in 2014 and 2015." There's usually a year or so lag between land values and cash rental rates.
Renegotiating cash rents downward for 2015
First thing you need to do is to consider which of the farms that you rent will require renegotiation, then decide how far the cash rent must be lowered.
Two things will help determine the need for adjusting rents downward, says Johnson. First is the farm's current cash rental rate compared to the average rent in your area for land that is similar in productivity to your farm. Iowa State University conducts an annual survey of cash rent by crop reporting district in Iowa and the results are released in May. In 2014, Iowa's statewide average cash rent dropped $10 per acre.
The 2014 survey results can be found in ISU publication FM 1851/AgDM C2-10, Cash Rental Rates for Iowa Survey.
The second factor is how fast cash rents on a farm have gone up in recent years. If the cash rent on a farm has lagged any increases, there may be rationale for keeping the cash rent high into 2015.
How far should cash rents be adjusted downward?
How far downward should you go, if the cash rent should be lowered in your situation? Cash rents need to be below the operator and land returns for the farmer to have a positive return on his investment in farming the land. Based on current prices on futures markets for corn and soybeans, say you figure a $3.75 price for corn and $10 for soybeans. With a 194 bushel per acre yield for corn and a 59 bushel per acre yield for beans the farm operator would get a net return of $167 per acre, considering current average crop production costs. However, with a 184 bushel per acre corn yield and a 52 bushel per acre bean yield, the operator would net $140 per acre.
If the farmer is paying $225 per acre cash rent in 2014, that cash rent in 2015 would have to be dropped considerably to make a profit.
Look at the possibility of using a flexible cash rent lease
Renegotiating cash rent can be difficult. Aside from walking a fine line with the landowner, it is difficult to determine accurate projected commodity prices to use in budgets in the fall—and gross revenue from an acre will depend on supply and demand conditions for the crop. Predicting 2015 planted acreages and yields and demand isn't possible this early in the game, for a variety of reasons.
One possibility for dealing with variable revenues and returns is to use rental arrangements that vary lease payments based on economic performance. Crop-share rental arrangements which share revenues and direct costs between the landowner and farmer are one such alternative. Another alternative, says Johnson, is to use a variable cash lease, also known as a flex-lease. This type of lease has a minimum cash rent that is paid by the farmer to the landowner. A "bonus" may be paid if gross revenue is higher than a base revenue that is agreed upon by the landowner and the farmer when the lease is written.
For more information: "Improving Your Farm Lease Contract" is an article written and updated as of July 2014 by Kelvin Leibold, another ISU Extension farm management specialist. This article spans lease types, advantages and disadvantages, various considerations – management and legal, and lease termination issues.
New farm program tools: Landowners and farm operators received a letter in the mail this past week from USDA's Farm Service Agency concerning reallocation of base acres and an opportunity to update your farm program yields on file at the FSA office. This concerns the new Agricultural Risk Coverage or ARC, and the new Price Loss Coverage or PLC, both programs created in the new 2014 Farm Bill, says ISU's Steve Johnson. "Landowners and their farm operators should include as part of their 2015 cash rental rate negotiations a discussion on the base acreage reallocation and yield updates," he notes, "as well as the ARC or PLC election decisions and annual enrollment for 2014 and 2015 crops."
For farm management information and analysis visit ISU's Ag Decision Maker site at www.extension.iastate.edu/agdm; ISU farm management specialist Steve Johnson's site is at www.extension.iastate.edu/polk/farm-management.