Cash Rent Reset - 1
Marcia Zarley Taylor DTN Executive Editor
Fri Sep 4, 2015 08:46 AM CDT
(Page 1 of 3)

HADDONFIELD, N.J. (DTN) -- In the Dakotas, managers at one farm operation have rehearsed how to break the news to landlords they plan to terminate their least-profitable rental properties this fall. In central Ohio, another 5,000-plus-acre operator has eyed his bottom 10% leases for possible culls. Farms without drainage, subpar yields or fields too far from home base may get the axe or require steep rent discounts to continue.

Farm tenants are cautioning Iowa realtor and farm manager Steve Bruere they need serious rent concessions in 2016. (DTN photo by Elizabeth Williams)

In areas of Indiana and Ohio inundated with rain this season, university economists predict a high cash rent "churn" rate for 2016 if current operators can't get some kind of rent relief. Some operators are making a pre-emptive strike, but some "alpha" farmers who expanded on high rent and borrowed money may have little choice if they want credit next season. Young and beginning farmers without family backing also are vulnerable.

Firing the landlord hasn't occurred much since operators' fortunes collapsed in the 1980s. Back then, Midwest cash rents tumbled a cumulative 35% between 1983 and 1987, then marched mostly upward for the next three decades, Chicago Federal Reserve data shows. But season-average corn and soybean prices slid 48% and 35% respectively in the last two years. Next year's corn and soybean futures don't look any brighter.

That grim outlook leaves many of today's cash renters with a string of back-to-back losses and a wide gap in their projected 2016 budgets. Cash rents are a prime target for cuts since they can represent a third or more in Corn Belt expenses.

"Corn prices didn't top $4 for the 2014 crop, and it doesn't look like they'll do it for 2015 and at least 2016," cautioned University of Illinois economist Gary Schnitkey. It's an unpopular message, but "if operators don't do something [to cut costs], they could wipe out all they made between 2010 and 2012," he told DTN.

Even solid operators with money in the bank might not want to fritter away those hard-earned gains. "I know there's a risk that someone in the neighborhood will offer to pay a higher price [if they ask for a rent adjustment]," Schnitkey said. "But if someone isn't factoring lower rents into their equations for 2016, maybe they don't realize the extent of what they risk losing with three years of $3.65 to $3.75 corn."


In Iowa, farmers are getting the message. "The conundrum is do I terminate or do I not terminate," observed Steve Bruere, president of the farm realty firm Peoples Company, in West Des Moines, Iowa. State law requires either the owner or the renter to notify their intention to terminate a lease Sept. 1 for the following crop year. If that ever happens, it's almost always the owner's initiative, not the tenant's, Bruere said.

"This is a really different scenario. It's the first time in my lifetime -- maybe since the 1980s -- where renters are serious about walking away from their leases unless they get some concessions," Bruere added. About two weeks ago, operators started calling his office, saying they'd like to continue renting, but definitely not on the same terms and prices as 2015.

"We said fine, send the owner a lease termination. They won't be offended. We can continue price negotiations later," he said. To soften the blow, Bruere suggests lowering base rents, but building a flex formula that rewards owners with a cash bonus at year-end should actual yields and/or an average market price at the local elevator improve revenue prospects.

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