This is the second part in a four-part series running this week on FarmFutures.com. See links to the series at the end of this story.
If you expect cash flow problems due to low crop prices, meet early and often with lenders, landlords and anyone else who is handling your debt.
Landlords are often retired farmers who know the ups and downs of the business. They can serve as a partner or mentor in navigating the tough times, providing they know in advance what the problems are. But the key is overcoming the disappointment of the situation and initiating the conversation. This is particularly important if you intend to keep farming that land.
"Do not wait until you cannot pay. Communication is the best remedy," says James Farrell, president of Farmers National Co., a land management and real estate company. "To sit back and not tell anybody anything is the best way to burn bridges."
One Indiana farmer says his regular contact with his landlord helped him stay on good terms when the 2012 drought cut production.
"I needed to tell the landlords that their rent is safe," said the farmer, who asked not to be identified. "You cannot over-communicate when there is a crisis."
Cash rent not coming down
Reports of farmers unable to meet cash rent obligations have been common, but talks with consultants and academics indicate the problem may be limited to 5% of farmers at the most.
"While 5% does not sound like much, it is a significant increase over what we normally see," says Roger McEowen, director of Iowa State University's Center for Agricultural Law and Taxation. "I think you will see it [rent payment difficulties] when the second payment comes due in 2015."
Second payments are typically due in the fall after harvest.
Walking away from a rent payment can be a career-damaging decision, warns McEowen. Word will quickly spread, making it difficult for the farmer to rent land in that area. Also, in Iowa, if the right paperwork is filed, landlords have first right to seize a farmer's crops and other nonexempt personal property on the farm to cover any unpaid rent. This could include tractors and other high-dollar assets depending on the amount of the unpaid rent.
At Farmers National, the year's rent is collected in advance, usually in March, which protects the landowners should tenants run out of cash. About 3% of last year's tenants at Farmers National did not renew leases, a high amount when compared with previous years.
"It is more than what we would have seen three, four or five years ago," says Farrell. "But in light of the drop in commodity prices, it is pretty moderate."
Part of the problem, farmers claim, is that rent has not come down with crop prices. The Farm Futures survey found that 13% of respondents will not farm at least one of the farms they rented in 2014 because the owner wouldn't lower cash rent.
The survey showed 21% of respondents said their average cash rents were lower in 2015, 12% said they were up, and 56% said they were unchanged. There were 11% who said they do not rent land.
Survivor's guide to low commodity prices: Cost cutting – Part one
Survivor's guide to low commodity prices: Communicate with partners – Part two (current entry)
Survivor's guide to low commodity prices: Free up cash – Part three
Survivor's guide to low commodity prices: Survey says – Part four