What Do Landlords Want? Part One of Two

What Do Landlords Want? Part One of Two

Land costs can make or break 2015 profit margins

About 250 bucks.

That’s how much a 2015 acre of corn should return after power and variable costs on highly productive land (about 196 bushels per acre), says University of Illinois ag economist Gary Schnitkey.

The problem is, that’s the return to farmer — and landowner.

If they happen to be the same person, then no worries. But if you’re renting in places where cash rents average $300 per acre or more, you have a problem, and it has red ink all over it.

"On farmland not professionally managed, there may be a considerably more lagged relationship between changes in returns and changes in rent levels," says University of Illinois economist Gary Schnitkey.

“Farmers are going to operate at a significant loss next year unless you own all your land free and clear, and those are usually guys in their ’70s,” says Bill Horan, a Rockwell City, Iowa, farmer. “Land cost is the only variable; I can’t control diesel, seed, tires, batteries or equipment costs. The only thing that can significantly change and put farmers in the black is land costs.”

Land rents vary wildly from state to state and county to county. In Illinois, USDA reports cash rents for 2014 ranged from $80 per acre for fair land (corn yields below 150 bpa) to $380 per acre for land rated excellent (190 bpa or higher). Average rents in Illinois have increased from $132 per acre in 2006 to $234 per acre in 2014, a 77% increase over eight years.

During that time, crop prices offered profit opportunities — sometimes big ones. And farmers took advantage. With big crops in 2013 and 2014 depressing prices, those profit opportunities may be rare going forward, so that’s why the cost side of the budget must be given a hard look this winter. It’s also why this will be a pivotal time for landowner-tenant discussions. It starts with a meeting with every landlord and a willingness to open your books to discuss common goals.

Of course, sometimes landowners have farm managers working on their behalf. According to Schnitkey, that may actually be to a farmer’s advantage.

According to a midyear survey of the Illinois Society of Professional Farm Managers and Appraisers Association, cash rents on professionally managed land were already decreasing from 2013 to 2014, while average cash rents in general increased $10 an acre.

According to the survey of professional managers, cash rents on professionally managed land are expected to fall even more for 2015.

Why? Farm managers who track the farm economy may be more willing to adjust rents lower since they are more aware of crop prices and expected revenues.

“Farm managers follow agricultural markets, likely much more closely than landowners without management,” says Schnitkey. “As a result, farm managers likely set rents closer to those suggested by market conditions. Now that prices have decreased from levels experienced during 2009 through 2013, farm managers are lowering cash rents. On farmland not professionally managed, there may be a considerably more lagged relationship between changes in returns and changes in rent levels.”

Farmers who offer a cash bonus on top of cash rent payments already have goodwill built up with landlords. However, landlords need to know that the bonus is offered in good times and may not be available when times are tight financially.

Tomorrow we'll dig deeper into ways you can build better relationships with landowners.

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