Corn+Soybean Digest
Are farmers walking away from rental contracts?

Are farmers walking away from rental contracts?

A recent Reuters news article titled “Rent walkouts point to strains in U.S. farm economy,” claims that some farmers have abandoned farmland-rental commitments. “Some farmers…are taking an extreme step, not widely seen since the 1980s: breaching lease contracts, reducing how much land they will sow this spring and risking years-long legal battles with landlords,” the Reuters article reports.

It’s hard to quantify how solid this trend is, but it’s no surprise that “2015 is going to hurt,” says Purdue Ag Economist Michael Langemeier. He projects at least 75% (of Indiana corn-soybean farmers) will be in the red, and their average 2015 earnings will be negative. “Looking at 2013 into 2014 and 2015, I see a $100 per acre earnings drop, to minus $70 per acre, for west-central Indiana corn/soybean growers.” Langemeier is assistant director at Purdue’s Center for Commercial Agriculture.

A number of east-central Iowa row-crop farmers terminated their land contracts this fall, says Ryan Drollete, Iowa Extension farm management specialist. “A number of producers shared that with me during August and September meetings; that they couldn’t afford to renew contracts, some of which had existed for generations. They sent their termination letters, and in some cases moved on to cheaper ground.”

Iowa has a state law requiring tenants and landlords to notify one another of a lease contract termination by September 1.

 “Producers don’t want to let farmland go that they won’t get back when things improve. Next year’s cash flow projections make them question how they’ll make it through the next few years.”

 

Farm the best; leave the rest

Farm the best, leave the rest” is on the advisory bumper sticker that banker Michael Swanson gives to farmers. “They’re gambling hundreds of thousands of dollars that it’s worth holding onto overpriced rented ground, and losing $125-130 per acre, in order not to lose that ground before crop prices rebound,” says the Wells Fargo ag economist and senior vice president. “History tells us that 25%-30% of gross crop revenue ends up as cash rent over the years; so 200-bushel corn at $4 gives you $800 per acre gross revenue and $200 per acre cash rent over time.” The problem is, it takes time and sometimes heartbreak for landlords to acknowledge the new reality.

“The problem is, we are in a whole new ballpark now, with $50 crude oil that devalues ethanol, and a strong dollar that hurts U.S. ag exports,” Swanson says. “I hear from my colleagues about quite a few large-farmer bankruptcies and failed land transactions based on old assumptions. Clearly, a lot of that ground will become available again.”

"It might be better to let it go and cut your acres back, cause if you lose $100 per acre on a farm have to make up that loss from other farms,” says Kent Thiesse, vice president of MinnStar Bank, Lake Crystal, Minn.

Gary Schnitkey is most concerned about row crop farmers renting more than 90% of their ground at high cash rents. “If I were in their shoes, I’d pull the plug (on high rent contracts), but I’m not farming,” says the University of Illinois Extension farm management specialist. “We saw some good returns in 2010-2012, and it’s really hard to lose farmland; there’s always hope.

“Average cash rents in central Illinois are at $300, with the high end at $350 and $400. They’ve been increasing by close to $100 an acre since 2006. If we have $4 corn this fall, you’ll see rents drop considerably. Farms’ financial position is strong from 2010-12 good strong, so many have cash reserves built up, but they will disappear real quick.”

The cash-flow outlook for row crop producers is “pretty bleak; a caution flag,” says Thiesse, “Hopefully we’re not returning to the 1980s, when some landlords didn’t receive the second half of rent payments because of cash flow problems.” The southern Minnesota banker sees a “big variation in how his customers emerged from last year. Some depends on whether they had the 80-85% crop insurance coverage, or just the 75%. And of course they’re better off if they have the diversity and discounted fertilizer from hogs.”

Approximately “10 % of cash crop producers in the Upper Midwest are likely facing some very challenging cash flow issues in 2015,” Thiesse adds.

Cloudy price discovery

Fewer land sales make it more difficult to identify farmland’s true value in a changed marketplace. Wells Fargo’s Swanson “dug into the numbers behind farmland sales, and in south-central Minnesota, for example, the number of land transactions has dropped by 60% in that multi-county statistical reporting area since 2012. So now there are only 40 sales, versus 120 sales in the boom times, as barometers of land values at this critical time.”

At least 40% of farmland was leased or rented out in 2012, according to USDA data, in the Corn Belt and the grain-growing Plains, the Reuters article says.

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