A View From All Sides
The past few weeks we have visited with several farmers and landowners talking about 2015 operating agreements. To help all involved to “walk in the other person’s shoes” here are some basic premises of each party’s thoughts.
The Farmer’s Prospective
Most producers would like to reduce the rent paid compared to 2014. But the typical fear is “will I lose the land if I suggest reducing rent or perhaps if I even bring it up?” This is a question you will need to answer for yourself. Here are a few comments made by operators we’ve talked with:
- “I am willing to take a loss for 2015 in order to remain the tenant if the landowner does not want to reduce the rent.”
- “If they do not want to reduce the rent and the farm is on the outer edge of my circle, patchy, and typically in my bottom 20% production, I am willing to let another person farm it.“
- “I can lose money in 2015 but not again in 2016, so something will have to happen.”
- “I was fortunate to have a 5 in front of much of my corn pricing, and with better than average yields, I can take profit from this year and help pay the higher rent for next year.”
Farmers are looking at each individual field and Landowner to decide their course of action. Other areas vary, of course, but in the U.S. Midwest, cash rents are set in September, October, and November and if we look back over the past 5 years, cash rents always seemed to lag a year behind when revenues and profits are increasing. As we see the roller coaster go down the hill, will cash rents lag again? Probably so. If commodity prices continue their current progress, perhaps 2016 will be the year for significant decreases.
The Landowner Perspective
Most landowners want their tenant farmer to make money and some will lower their cash rents if you have a good relationship and you visit with them and provide good information as to why you want to reduce the rent. It seems some landowners have long memories and ask “Why should I lower the rent, when the farmer was making $200-$300 per acre net profit the past few years?
He did not offer me more money then. I am going to take a little more this year to make up the difference.” As mentioned above there is lag time on cash rent values, so this landowner’s comment can be tough to argue with. Typically if you stay in good, close communication with your landowners, you can come to an agreement that benefits both of you.
Investors or financial institutions look to make a 3 to 5% return based on the value of the farm (comparable of recent sales or appraised value). These folks are not wanting to move on cash rent values, but it does not hurt to visit with them and see if there is any movement.
Farm Manager’s Perspective
Farms managers understand the plight of both sides, but at the end of the day, they have a fiduciary responsibility to the landowner, so they must act as such. While they will assuredly sympathize with you as the farmer, don’t be surprised if they play the trump card of “If you do not want to pay this price, I have 5 other farmers willing to pay it, or maybe even higher.” However, there may not be a landowner or farm manager that can play that card right now with our current environment.
In closing, we have had great profit in farming the past several years but things do change. Now is a good time to talk about 2016 with your landowners to help set the stage for lower cash rents if commodity prices stay the same in 2015. Be honest and upfront with them and show them your costs and offer different pricing scenarios to help them understand profit potential for you and them.
Transparency is typically a wonderful policy.