You can't support high cash rent for cropland on $3.25 corn and $10 soybeans. Do you need to re-negotiate your cash rent for 2015? How low should it go? Perhaps you need to look at other types of cropland rental arrangements other than cash rent. Some farmers are talking about trying to convince their landlords to switch to a crop-share lease. Others are considering a flex-lease type of arrangement. The goal is to share the risk as well as the reward.
Economics always has a way of working things out, notes Mark Gannon, president of Gannon Real Estate and Consulting. He has been in the farm management and real estate business since 1979 and recently moved his business headquarters from Ames to Des Moines. He and his staff offer a consulting service called U.S. Farm Lease, which he founded in 2008. Gannon saw the need for a system that can bring farmland owners and operators together to develop a crop rental agreement that's fair to both parties.
Lots to think about as you negotiate crop leases for 2015
So, what will happen to farm leases as a result of the recent downward slide in crop prices? Gannon provides the following thoughts and information. And he encourages tenants and landlords to look at renting cropland with a longer timeframe in mind than just next year. Here's what he's thinking as of mid-August 2014.
When you drop the price of a commodity 50% in three years including a drop of 25% since August 2013 then the squeeze is on. At the time of writing this article the forward contract price for corn at harvest is $3.19 per bushel. On August 1, 2013 it was $4.30, on August 1, 2012 it was $7.59 and on August 1, 2011 it was $6.50. At the same time input costs have risen for most operators.
What about the price of soybeans? Prices for this crop, as of August 2014, have stayed better on average than corn. The dirty secret is that soybeans are a distant cousin to corn in determining cash rents. Iowa farmers raise corn first and soybeans second thus don't base their economics on the second crop.
Put marketing opportunities in proper perspective
Crop prices tend to vary and landowners shouldn't base their rental decisions for 2015 on prices in August 2014 just because the lease cancellation deadline is September 1. The fact is there is a lot of variation in crop prices. In our office we keep track of the daily marketing opportunities during a marketing year. For instance for the 2013 crop we looked at local forward contracting prices from March 2013 through October 2013 and then cash prices from November 2014 through July 2014. Realistically this is the range when most growers sell grain.
You can obviously forward contract earlier and hold grain to sell longer than that but you have to put a limit somewhere. The chart below shows the high, low and average for the last 3 marketing years— plus the average so far for the 2014 crop marketing year.
Year High Low Average
2011 $7.35 $5.08 $6.14
2012 $8.38 $4.65 $6.29
2013 $5.33 $4.14 $4.72
2014* $4.74 $3.29 $4.22
* Denotes 2014 crop marketing year so far, as the marketing year started Sept. 1, 2013.
From the accompanying table you can see that farm operators have opportunities to sell their grain at higher prices than what is offered in August of the year before the next leasing period. But you need to keep in mind that price is only one factor in determining profitability. Gross income is the main consideration, and that is a combination of price times the yield. Everything being equal, then the higher yielding farms will make more money and the tenant can afford to pay more rent.
Farmers need to share yield information with landlords
I know this seems easy but we have already lost a lot of owners because they don't have good yield data on their land to figure gross income. It makes a big difference comparing an average of 220 bushel per acre corn to 120 bushels per acre. Some landowners could be getting a 220 bushel per acre rental rate while at least a portion of the land is only producing 160 bushels per acre.
Some owners can't understand their tenant's reluctance at paying a $200 per acre rent when they hear that other landowners in the area are getting much more. Most tenants will let you know about poor yields and shy away from telling you about the good yields. You can't blame them. Most tenants have never been asked for that information by their landlords or have never had to verify it to their landlords. These tenants are just being good businessmen and not showing their hand.
Work together to make the farming operation profitable
This is a part of farming where things are changing on the farm today—where in more and more situations the records are open and both landlords and tenants are working to make the farm as profitable as possible. This way, both the tenant and landlord are establishing a fair, long-term business arrangement and there is no need to worry about cancelling leases prior to September 1.
There is no good reason for tenants to not share with landowners all the GPS maps, yield monitors, digital soil tests, fertilizer records and seed records sponsored by co-ops and seed dealers. There is no doubt that the future of farm leases are flexible cash rent leases.
Consider benefits of using a flex-lease, for both parties
There is still some resistance to share this information and use flex-leases. The resistance is coming from operators especially ones with reasonable or low cash rents. Also, some owners are reluctant since they like the simplicity of cash rent arrangements.
However, most landlords can get the rent they are currently getting guaranteed, plus the chance for more—in the form of a bonus rental payment— after harvest. I am of the philosophy that more is better than less.
We know some operators skimped on fertilizer in 2014 due to lower crop prices and narrow profit margins. What will these farmers and others do in 2015 if we stay where we are—in terms of tight margins or perhaps no profit? The answer is the farm will have even less potential to make a good yield in the future. You need to be assured your farm and its soil fertility is maintained to provide good yields and plant root structure to support good stands, with less soil erosion. Landowners routinely find out too late that this is not the case.
A flexible cash rent lease requires accurate records
So what about the question: "What Will Happen to Farm Leases with $3.25 per bushel corn?" In most cases the same old guessing game, guilt trip and anxiety session with the wrong lease amount chosen for one or both parties – don't let this happen to you. The best alternative is to use an adjustable cash rent lease, with good records—accurate, reliable production records.
This is the best approach for both landowners and tenants, especially younger operators who need flexibility and the chance to show they can produce and what they can do to make the farm operation work for both parties.
To contact Gannon Real Estate and Consulting, phone 515-243-3229 or email [email protected]. The website offers information at www.gannonre.com and the office location is 305 NW 48th Place, Des Moines, Iowa 50313.