There will be an increase in the amount of negotiating going on from now until March 1 between landlords and tenants regarding cash rent for cropland in 2011. "I can already tell from the phone calls and emails I'm getting that there's a lot of interest in renegotiating," says Steve Johnson, Iowa State University Extension farm management specialist in central Iowa.
What should cash rents be on your farm for 2011? Should cropland rental rates be raised? What's fair to both parties? Those are questions ISU Extension specialists, ag lenders and others are getting.
"Go back to late June 2010," says Johnson. "The price for new crop 2011 corn has increased by over 45% in the past six months. Soybean prices for the new crop have increased over 40%. Many of the current leases and rental arrangements were not adjusted to reflect the higher potential for crop prices for 2011."
How about using a flexible cash rent lease?
Wallaces Farmer doesn't want to get a lot of phone calls from farmers saying "the media is driving up the price of cash rent by talking about higher cash rents." But the reality is, that's the direction land values and rents have been going since 2008, reflecting higher crop prices.
What about using a flexible cash rent lease instead of a regular cash rent lease? The rental amount the tenant pays in a flexible cash rent lease is based on how crop prices and yields actually turn out that year and potentially on that farm. Johnson is now seeing renewed interest in flexible leases.
"We saw a lot of creativity in how leases were written in 2007 and 2008, when there was a big increase in grain prices," he says. "We saw some landlords willing to share in the risk with the operators, by using flex leases. However, the interest in flexible cash leases died down when crop prices declined considerably in the fall of 2008 and winter of 2009. Now with the grain market heating back up again, we are getting some questions about flexible cash rental arrangements and writing new leases."
Cash rents do adjust, but it takes a year or two
Johnson adds, "The problem with figuring a straight cash rent is you are usually a year off. You are trying to guess what will be the potential revenue, yield times price on that farm one year from now. It's difficult because we just pick one price. It's kind of like shooting with a single shot rifle. You get just one shot. Cash rents do tend to adjust but usually it's a year or two years after the run-up in crop prices. I will not be surprised to see that happen now."
ISU Extension conducts a cash rental rate survey each year in March. The results are reported in late May. "We won't see the likely impact of these higher crop prices fully on cash rent for cropland until we get into 2012," says Johnson, "That's because many of the cash rent lease agreements for 2011 are already in effect and the rental rates might not be changed significantly. So the ISU survey that will be taken this March may not fully show the potential average increase."
Most prefer the simplicity of straight cash rent
Ideally, it seems it would be in the best interest of both the landlord and tenant to come up with a creative rental arrangement that benefits both parties, considering the volatility in crop prices, input costs and production risk that agriculture is experiencing today.
"I agree," says Johnson. "You have to think win-win. But the reason people shy away from using flexible cash rental agreements is because using straight cash rent is so simple. Basically, cash rent is 'How much are you willing to pay me per acre to rent my farm for this next crop year?' And in many cases that is a split payment. The landlord gets half of the yearly rental payment before the crop is put in the ground and the other half after the crop is harvested."
For many years people have been using simple cash rental agreements. "However, I'm a proponent of using flexible cash leases," says Johnson. "The flex leases take time and thought by both parties, thus the lease is written so that it treats both parties fairly."
Multi-year cash rent leases have advantages too
Johnson is also a proponent of multiple year cash leases. That means a flexible cash lease or a straight cash lease that would be in effect for several years. "For example, if I were a landlord trying to negotiate a higher cash rent for 2011, I might want to also lock it in for 2012," says Johnson. "And that would take us to the end of this current 2008 Farm Bill."
It takes some time and effort to renegotiate a cropland lease. The farm operator needs to educate the landlord as to what is the impact of these higher crop prices, says Johnson. That's the importance of the annual crop production cost estimates available from ISU Extension. These numbers give people the best estimate of what it will cost farmers to produce crops in 2011 in Iowa.
ISU's "Crop Production Cost Estimates" for 2011 available
ISU Extension economists released their 2011 Crop Production Cost Estimates the first week of January. Look for publication number FM-1712 on the ISU website. ISU Extension economist Mike Duffy authors that publication. You can find it on the ISU Ag Decision Maker web page www.extension.iastate.edu/agdm.
To come up with the cost of production estimates, Duffy uses the Iowa Farm Business Association's data, gathered from hundreds of farmers who keep crop records with that organization. Duffy also conducts phone surveys of suppliers to get an estimate of crop input costs for the coming year. He then comes up with a "best estimate" to help answer the question: What is it going to cost to grow a crop in Iowa in 2011?
Tune-in to "Managing 2011 Crop Margins" webcast
An early look at Duffy's estimates indicates a roughly 14% increase in cost of production for growing corn and soybeans in Iowa in 2011. "We've certainly seen an improvement in crop prices in the past six months, but the increase in the cost to grow the crop is significant too," notes Johnson. "Managing crop margins will be the key for farmers to manage their financial risk in 2011."
Johnson has a webcast recording on "Managing 2011 Crop Margins" with helpful information you can listen to and view on your home computer. The link is http://connect.extension.iastate.edu/p72913459/