My son believes there will be pressure to lower cash rents for 2020, and he wants to offer our landlords $20 per acre less for next year on farms where the lease is up. I’m afraid that might cost us some farms. What do you think?
The Profit Planners panel includes David Erickson, farmer, Altona, Ill.; Mark Evans, Purdue University Extension educator, Putnam County, Ind.; Jim Luzar, farm owner and retired Extension educator, Greencastle, Ind.; and Steve Myers, farm manager, Busey Ag Resources, LeRoy, Ill.
Erickson: I would not be in a rush to lower your cash rent offer. While that may ultimately be the wise decision, there is time to see how commodity prices and actual production affect your profitability. Take a steady and reasoned approach to your rent discussions. Provide actual expense and revenue information to the landowner that will set the stage for future talks. A rush to judgement could, in fact, cost you the farm.
Evans: General market pressure to lower cash rents would be broad-scale. If a $20 decrease did cost you farms, then perhaps you should be glad to be on the more positive side of profitability, as there is usually someone who is too aggressive on cash rent bids and ends up with consequences due to unsustainable cash rents. You don’t want to be that person!
At this point, 2019 looks to be one of the most challenging years since perhaps the drought in 2012. We don’t know if 2020 prices, aside from geopolitical drivers, will move higher due to less supply from the 2019 crop, or if next year will continue with low prices, with a close-to-normal 2019 crop from outside the disaster areas. One must be very careful to not be in dire fiscal trouble next year.
Consider a flex lease where you have the $20 decrease in cash rent and a price point that would address your risk and give the landlord opportunity should there be a more positive market outlook. Make sure there’s adequate communication with your landlords, and highlight what you’ve been doing for them in the give-and-take, landlord-tenant relationship.
Luzar: I understand your son’s goal of improving profitability of the farm business during a period of extremely tight margins by addressing land rents. I disagree with the approach and will use fertilizer usage to make my point. Each farm has different levels of productivity and history with respect to fertilizer applications. You evaluate each farm individually and address fertility program farm by farm.
Consider evaluation of cash rent using a similar approach. Some farms may need even more adjustment, due to level of rent paid and capability. Some may be relatively profitable at current rent level. Land-grant universities have great decision-making tools to assist you in making this evaluation more analytical and less emotional. All farms aren’t created equal!
Myers: I suggest holding that thought. Timing is everything, and it’s still very early in the game to make that assumption with so many unknowns in 2019 on crop size, trade issues and overall farm economy. I believe an appropriate timing of such consideration and negotiation to be after harvest. When that time comes, more will be known by both parties. A possible consideration to help take bumps out of the road is a flex cash lease that considers a base rent minimum with yield and price considerations.