As printed in the latest edition of Michigan Farm News.
Over the last four to five years, much has been written about farmland values. Many reports have documented the rapid increase in land values fueled by record farm incomes, more recently the focus has changed to speculation on how big a correction in land values to expect.
Farmland rental rates are closely, but not perfectly, correlated with land values. In general, rental rate trends lag land value or farm income trends. Consequently, many farm operators are now faced with rental rates negotiated at a time when farm income prospects were much better than we are facing now, with sub $4.00 corn and sub $10.00 soybeans. It is pretty tough to pencil out a profit at these prices when paying land rent of $150 - $250 per acre. So, what are the options?
Renegotiating land rents is difficult; few landlords are going to welcome the opportunity to cut their income. Hopefully you have cultivated a good relationship over the years with these individuals and can leverage the economic realities of lower farm income into a lower rental rate.
A hybrid lease, also known as a flex lease, may be an available option. This type calls for a base cash rent, with the opportunity for additional payments to the landowner if certain price levels or yield results are attained. This kind of lease can provide the landowner with a means of capturing additional rent when market conditions improve, without locking the farm operator into a non-economic rent if market conditions do not improve.
Renting on shares could be another possibility. Many years ago, before cash rents became popular, share leases were the norm. With this option, the landlord receives a percentage of the crop as rental payment, and is then responsible for marketing the crop. This exposes the landowner to both production and pricing risks, but also creates the opportunity to reap the benefit of high yields and/or high prices. The advantage to the farm operator is that it reduces the amount of working capital needed to pay cash rent. However, it does present a challenge. Production from a farm rented on a share basis must be segregated and accounted for separately from other rented or owned land.
Landlords need to recognize there is collection risk involved in renting their farmland. Years ago I did an appraisal for a customer that had several homes he rented to others. I made the comment to him that the rent price he was charging seemed low. His reply was, “I’d rather deposit $400 every month than continually chase $600.” As a landowner, keep in mind accepting a lower rent than you have received in the past may be a better alternative than attempting to collect one that is not economically sustainable.
Jim Garvey is a VP - Chief Appriaser for GreenStone Farm Credit Services.