How to manage your 2021 farmland rent agreement
The September 1 deadline for notice of changes to farmland leases in some states is looming. For farmers, that means there is a good deal of number crunching going on, and in many cases the math isn’t pretty.
Cash grain prices sitting well below 2019 levels are forcing farmers to rethink their 2021 rental agreements. Can Illinois, Iowa, and Indiana farmers afford cash rent of $222, $230, and $194 per acre, respectively, when the 2020 national market year average price for corn and soybeans is projected to be $3.35 per acre (down 25¢ from last year) and $8.50 (down 5¢ from last year)?
It’s a tough situation, says Kyle Walker, farm manager for Peoples Company, a Clive, Iowa-based real estate and farm management company.
“Lease negotiations for the 2021 crop could be complicated. Every situation should be handled on a case-by-case basis,” Walker says.
Since 2018, lower crop prices have been offset by ad hoc federal aid in the form of Market Facilitation Payments and the Coronavirus Food Assistance Program, according to the University of Illinois Department of Agriculture and Consumer Economics. These payments have been a lifeline for farmers, representing up to 60% of net farm income for these years. As of yet, there has been no announcement of forthcoming ad hoc payments for 2021.
An Illinois case study
To set the stage for cash rental rate decisions for 2021, take a look at the crop budget for Illinois, from the U of I’s August 11 Farm Doc Daily:
For 2021, operator and land returns for a 50% corn 50% soybeans rotation is projected at $224 per acre based on several key assumptions:
- 2021 prices are $3.40 per bushel for corn and $8.50 for soybeans, representing an economic recovery that is V-shaped.
- Commodity title payments total $30 per acre. This $30 per acre includes roughly $60 per acre of Price Loss Coverage (PLC) payments on base acres in corn. No payments are included on soybean base acres.
- 2021 yields are at trend levels of 217 bushels per acre for corn and 68 bushels per acre for soybeans.
- 2021 non-land costs are $568 per acre for corn and $360 per acre for soybeans.
- There are no ad hoc Federal payments.
FarmDoc authors point out that one can argue with a number of those assumptions, particularly related to ad hoc federal payments. It seems premature to estimate 2021 levels for federal aid, particularly given that a national election is scheduled for this November.
Those assumptions result in an operator and land return of $224 per acre. At our projections, a continuation of a $275 per acre cash rental rate in 2021 would result in a loss to the farmer of $51 per acre. Obviously, without reductions in cash rents or other costs, $51 per acre or more of ad hoc aid is needed to get farmers to break-even returns near $0 per acre.
The University’s economists project that, over the next five years, corn prices will average close to $3.50 per bushel, and soybeans, $8.60 per bushel, giving operator and land return an average of $240 per acre in central Illinois.
“This would suggest that cash rents would have to average near $240 per acre for farmers to have a return near $0 per acre, or that cash rents would have to fall $35 per acre for farmers to operate at a break-even level. In percentage terms, this decline would be 12.5%,” the economists write. The $35-per-acre reduction could come from non-land costs, but wherever they come from, it only gets farmers to break-even levels. Larger cuts will be needed to return to profitability.
The economists sum up the 2021 rental outlook this way:
Ad hoc federal aid is key to profits: Without ad hoc federal aid, farmer returns would have been negative in 2019 and 2020, and likely will be negative in 2021. One can speculate whether or not this aid will be forthcoming. Given this uncertainty, setting cash rents for 2020 will be difficult. Continuing setting cash rents at current levels will result in large losses if ad hoc federal payments do not occur.
Farmer returns have been low since 2014: Farmer returns in central Illinois on high-productivity farmland have averaged $17 per acre from 2013 to 2018 (see Figure 3). From a return standpoint, $17 per acre is a low return for engaging in the risk of farming a cash rent acre. A number of reasons can be given for largely stable cash rents in recent years including competitiveness within the farmland market, farmers’ fears of loss of competitiveness if rental acres are lost, buildup of financial reserves during the high return years from 2006 to 2013, and optimism about prices in the future.
What to do for 2021
Farmers are not typically in the habit of turning away farmland, but if paying cash rent takes them out of profitability, 2021 may be the time to do just that.
Better yet, the landlord and tenant have developed a relationship based on trust and communication, says Mykel Taylor, ag economist at Kansas State University.
“Farmers who have good relationships share a lot of information with them, and have a much easier time talking to them explaining the situation. Without good information from the tenant, landowners are getting mixed information from the media: how government programs are paying farmers a check, that the weather is good and farmers are going to have a good crop,” she says. “Most landowners will listen if you say you need to lower rent, if there is information explaining why. Whenever communications is one-sided, there is opportunity for misunderstanding.”
Taylor says growers are well-served to provide concise data to their landowners, on the performance of the landowners’ farms. Yield maps are good, because they indicate yield variability within a field. Many landowners may not understand that some areas of a farm field perform well, other areas may not.
“Sharing profit information may be uncomfortable,” she admits. “But I recommend sharing a state’s farm management data, which shows the performance of farmers across the state. You can tell the landowner you are above average, or below average. Also, share the farm management net farm income data, and that government payments were 60% of that total.”
Taylor says survey data at KSU indicates that farmer reliability and reputation is one of the key determinants in how a landlord chooses a tenant. “At the bottom of our survey results was rental rate amount,” she says. “Landowners do want to make money, but they know finding a good tenant is not easy. They want the land asset taken care of.”
After all the deliberation and number crunching is finished and you decide to terminate the farmland lease, there are steps you should take to do so properly, says Erin Herbold-Swalwell, an attorney with Brick Gentry, PC in Mingo, Iowa.
“There are so many things farmers are thinking about, and the legal stuff is probably last. But this might be the year to make some changes,” she says.
If you plan to terminate a lease, let the other party know in person, or by certified mail with a return receipt requested. If you are doing an oral lease, it’s time to move to a written lease. Most state land-grant universities have a written lease template, or check the Iowa Bar Association for a template, Herbold-Swalwell says.