DTN/Progressive Farmer

When he last stepped on his cardiologist’s scale at the mayo Clinic in September, Iowa farmer Ben Riensche was down nearly 200 pounds since his last annual checkup. While he doesn’t expect to lose as much from 2017 cash rents as he did on his near-Paleo diet, he’s hopeful slimmer lease rates will downsize his cost of production for $3 corn.

September was Iowa’s legal deadline for terminating farmland rentals for the coming production year. At that time, the renter or the landowner could terminate the lease. another option was to terminate it with the intention of retaining the operator but postponing a decision to reset rental rates until after harvest.

Chris Barron, a Rowley, Iowa, farmer and farm financial adviser, says they were seeing quite a few of the lattertype lease terminations in 2016.

“Not to cancel the lease, but with people asking to extend negotiations on rates into January,” he explains. this attitude of “wait and see what happens to commodity prices” has really gained traction, he adds.

WORKING CAPITAL DOWN. Profit margins for most midwest cash renters have been grim since 2014, topped by average $100-per-acre losses for Illinois growers in 2015. Cumulative losses doubled that scale the past three years, according to estimates from some farm lenders. a Rabobank analyst reported that three consecutive years of losses have “evaporated” farm working capital below acceptable credit standards in many cases.

Some lenders suggest average Iowa rents need to gravitate to around $190 per acre to restore profitability. It’s an adjustment that could take several more years and leave operators accruing losses in the interim. Looking back, USDA reports show Iowa’s average cash rents peaked at $260 per acre in 2014 but dipped to $235 in 2016. Premium land once commanded rents of $350 and up.

“A lot of cash renters paying market rates made money in 2011 and 2012, but gave back everything they made in 2013, 2014 and 2015,” Barron says. “Record 2016 yields lower costs per bushel, but even so, not many of my clients are in the black today. a 50-cent corn rally would get maybe half of them back in the black and in survival mode.”

University of Illinois economist Gary Schnitkey agrees most cash renters need closer to $4 corn to break even. But if corn prices average only $3.50 per bushel next season (with no farm program payments on the horizon), even high-yielding 200-bushel Illinois farms could lose $65 an acre on $245 cash rent, Schnitkey estimates. Soybeans at $9 or $9.50 offer a better prognosis.

SYMPATHY FACTOR. News stories about growing financial hardships have helped sway landowner attitudes this season, Riensche says. A year ago, some balked at appeals for rent relief, and some negotiations continued until planting season.

“Now, landlords seem to have the intuition that changes need to be made. In fact, most of them are just waiting for us to pop the question,” Riensche adds. “Most realize that they were living on
borrowed time. Maybe rents should have gone up faster when corn prices were escalating, but they should have also come down faster on the other end.”

The other factor in Riensche’s favor is that he paid landowners premiums after unusually good years from 2010 to 2014.

“We gave a bonus if a landlord was locked midstream in a reasonable multiyear lease that was under the trend. We also voluntarily increased year-to-year leases if the landowner was too shy to ask for something more in line with the market,” he says. Other landowners received improvements in lieu of cash, such as tiling, waterways or conservation work.

“It’s surprised me, but they have not forgotten that we ‘bonused’ them on the way up [in commodity prices], and they’re being magnanimous on the way down,” Riensche says.

Landowners in high-property-tax states like Indiana, Nebraska and Ohio may be a little more reticent to adjust. In northeast Ohio, property taxes are running $58 to $75 per acre, “which doesn’t look so good if rent is $150,” a DTN subscriber points out.

Randy Hertz, chief executive officer of Hertz Farm Management, in Nevada, Iowa, is sympathetic to operators’ needs but cautions average rent reductions might not be as big as some anticipate.

“It all depends on how well-informed farmland owners are and what kind of rent adjustments were made the past few years. It’s the average and aboveaverage rents that need concessions,” he says. “If you’ve got somebody from the big city who doesn’t understand the economics of farming, they may not be quite so interested in working with their farm operators.”

Hertz’s firm held a dozen landowner education courses across the Midwest this past summer to prepare owners for the new rental climate.

“Renting farmland isn’t like commercial property or leasing an apartment in downtown New York,” he says. “Some owners think you can just find anyone to pay the rent, but that’s not the case in agriculture.”