DTN Executive Editor Marcia Taylor reported today that, “Over the last five years, severe mood swings affected commodity prices, but standard cash rents have remained fairly immune to the 38% cut in corn revenue since 2012. In most states, they’re off a mere 5% to 10% from peak. Even Iowa’s red-hot rents only dipped from an average of $270 per acre in 2013 to $230 this year, according to USDA.
“‘A $25 per acre cut in cash rents won’t get corn growers to breakeven in 2017,’ said Purdue University Economist Michael Langemeier. ‘Another 10% to 15% cut in average rents might be in order though, several years down the road.’
“Even with budget cuts in production expenses, 2017 ‘breakeven’ rents in Illinois would need to plunge to $185 per acre for good soils with 185-bushel yield potential, estimated University of Illinois economist Gary Schnitkey in a webinar this week. That’s down from an average of $230 per acre in 2015 and assumes trend yields, $3.50 corn and $9 soybeans. (Professionally managed Illinois farmland brought $295 an acre on that same type of land last year, so it requires a much steeper shift to keep operators out of the red).”
Ms. Taylor indicated that, “‘Flex’ rents were designed to adjust more quickly to market moves, imposing higher rents when prices and revenue made that affordable for tenants. At the same time, owners agreed in advance to ‘de-escalate‘ rents if commodity prices swooned. In theory it was risk sharing. By 2011, more than 25% of all Illinois leases had been converted to flex terms, largely as professionally managed firms aimed to capture the upside of corn prices for their clients.”
Ms. Taylor stated that, “Flex rents were never universally popular. Some elderly landowners wanted the security of fixed rents, so they could plan their retirement budgets. Large-scale operators balked at the extra record keeping, since some formulas required payment based on actual yields per field. Some growers objected that professional farm managers set the base rent for bonuses too high.”
The DTN article also pointed out that, “Purdue University’s Langemeier believes the key to a sustainable flex lease is to set the base rent at an appropriate level, only paying bonuses in rare and extraordinary years. By that he cites years with a combination of $4.50 or higher corn and ‘fabulous’ yields.
“‘Some formulas set the base too low. They will have angst in negotiations with landowners if their base is 50% of the fair market rent now,’ Langemeier said. ‘If you set the formula right, it should mimic a crops-share lease.’ Long-term, land has been about a third of the cost of corn and soybean production, he said, so flexes should aim for that range.”
