Cash Rent Conundrum Tough Negotiations Ahead for 2019 Cash Rents

By Elizabeth Williams, DTN Special Correspondent

Steady land values are propping up equity in farm country, but it’s also making it tougher for farmers to negotiate lower rents in 2019. (DTN Photo by Elaine Shein)
INDIANOLA, Iowa (DTN) — Land values are holding steady despite the tumble in commodity prices, and the good news is that’s propping up equity in farm country, allowing sufficient collateral for land-owning operators to borrow funds. Unfortunately, stable land values also underpin landowners’ perception that cash rents should hold firm.

“In this environment, that’s an unrealistic expectation,” said Leslie Miller, vice president of Iowa State Savings Bank in Knoxville, Iowa. “Farm operators cannot afford to lose money by paying the same rents as last year.”

Miller met with one south central Iowa landowner who got $225 per acre cash rent in 2018. After running the numbers, she told him that his tenant would have to grow 205-bushel-per-acre corn to be able to pay that.

“The landowner admitted his ground was not that good,” Miller told DTN. With yields averaging 175 bpa, Miller suggested $180 per acre would be more realistic. The landowner said he’d be willing to do that if the total rent was paid upfront.

“Although the operator would have to pay six months interest on half of the rent normally paid in November, I think he would be able to do that for the reduction in rent,” Miller said. “Landowners should be willing to negotiate.”

Justin Dammann, who grows corn and soybeans and raises a cow/calf herd in Essex, Iowa, said steady cash rents complicate cash flow projections for 2019.

“You can be $80 to $100 per acre away from making money,” he said. “So, we aren’t just talking a $15 per acre reduction. We need a $30, $40, $50 per acre decrease. That equates to a 15% to 25% reduction in revenue for the landowner. Not many landowners are willing to accept that. They have tight budgets, too.”

The University of Illinois projects a $44 per acre loss in 2019 for a central Illinois farmer producing a trend line yield of 207-bpa corn with a price of $3.80 per bushel and a land cost of $245 per acre in 2019. The university’s economists also predict any cash rent above $201 per acre would lead to negative returns to farmers in 2019 under this scenario (207 bpa at $3.80/bu. corn).

SHARE REAL NUMBERS

“Every landowner is different, but the No. 1 thing to negotiate a fair rent is to be honest and transparent,” said Dammann, whose family farms is in three counties in southwest Iowa and has 22 landowners, including two in China. “Show them real numbers. There’s going to be a lot of red ink next year, especially with a large soybean carryover.