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INDIANOLA, Iowa (DTN) -- Defining a fair rent is likely to get a little tricky this fall. Landowners read the headlines, "Cash rents have to come down" for farmers to survive. "But my landowning clients ask what about equipment costs, family living expenses and crop inputs?" said Dale Aupperle with Heartland Ag Group in Forsyth, Illinois. "They don't want to be the only ones taking a hit."
Therein lies the conflict. For the farm operator, negotiated cash rents may be the simplest way to reduce costs for 2016. It's much harder to negotiate lower fertilizer and seed bills and remain highly productive. On the other hand, you don't want to lose your land base because your neighbor is willing to pay more rent than you.
"A landowner in Mitchell County (north-central Iowa) told me he had several farmers call him this month offering $350 per acre to rent his ground," reported Randy Luze, with Peoples Company, based in West Des Moines, Iowa. "His farm is very high quality -- 90 Corn Suitability Rating (over 225 bushels per acre yield) and crops in that area look great." A $350-per-acre cash rent has not been unusual for high-quality land in that area since corn prices peaked in 2013, he said. There's not much incentive for that landowner to lower his rent.
"Operators who try to build in a 10% to 15% return for the risk they're taking may have a neighbor who may not need that high of return," said Aupperle. In central Illinois, Aupperle doesn't see cash rents coming down more than 5% to 10% for 2016. Statewide they slipped a mere $6 per acre between 2014 and 2015, from $234 to $228, according to USDA surveys released in August.
Jim Farrell, president of Farmers National Company, based in Omaha agreed. "I don't see cash rents dropping very much for 2016, about 10% lower if the 2015 cash rent was at the market. There will be a farm program payment coming this fall. The amount will vary greatly by county, but it will be a cash infusion into agriculture at an important time. However, we'll likely see some stress from farmers not getting operating loans next spring," said Farrell.
EXPECT MORE FLEX
"We're seeing an increased interest in flexible cash rents," said Aupperle, who uses flexible leases extensively on the farms his company manages. At Farmers National, over half of cash rent leases today already carry a flex provision.
Iowa farmland owners Fred and Lodean Cook may consider flexible cash leases for the first time this year. The Cooks work with four tenants in four Iowa counties. "If we lower the base rent, we would consider using a 'flex' lease to share in the upside if things get better," said Fred. "We just don't know what will happen to yields and prices next year. Certainly, we want the operator to do well. But farming is a business. The tenant and the landowner share the same goals -- to make money," Fred added.
Flexible cash leases are a throwback to crop-share leases with some shared risk between the tenant and the landowner, explained Aupperle. "I see more risk sharing coming back into the equation. The tenant says to the landowner, 'You need to take some of the risk if you want that kind of return.'"
The problem with flex leases, said Cook, is you can't get all your payment upfront. "The flex part wouldn't be paid until Nov. 1 at the earliest."