Where land will go

We reached out to four agricultural experts to learn what you can expect for farmland cash rent prices for 2016 and beyond. The team includes a property manager, a realtor/auctioneer, a banker and an economist.

As president and CEO of Farmers National Company, Jim Farrell offers landowner services, including property management, in 24 states including MFA country. He thinks rental prices are headed for a bit of a fall.

“We expect a gradual decline in cash rents, with more pressure going into 2016,” said Farrell, who works from the company headquarters in Omaha. “For rental prices that were lowered last year, we believe most rents will stay steady to down some, but we don’t expect a major decrease.”
Farrell gets specific about how land rents already went down for 2015. “Rents in our region went down 10 percent to in some instances 15 percent from the 2014 high,” he said. However, he added, a certain percentage stayed steady last year, especially if the rent was not at market in 2014.

“Landowners have not been real sympathetic to the current drop in farm profits as they feel in many cases rents went up much slower than income over the past few years,” Farrell added.

COMMODITY PRICES FORCE RENTS DOWN

Josh Gerig is vice president at Murray Wise Associates, LLC, in Clarion, Iowa, which helps people sell, acquire and manage farmland. He points to high soybean and corn prices three years ago compared to today to explain why land and rent prices have been pressured downward.

“Land that sold here in Iowa for $11,500 to $13,000 per acre, for example, is now selling for $8,000 to $9,000 per acre,” Gerig said. “Rents that were $400 to $500 an acre annually are now $300 to $325. Next year, I’d say rents will be between $250 and $300.”

Rents may not be dropping quite as dramatically in Missouri. Ray Massey keeps his ear to the ground when he meets with farm groups as a professor in the Department of Agricultural and Applied Economics at the University of Missouri.

“I hear that tenants want lower rents, but landlords are hesitant—they’re holding tight,” said Massey, who works out of Columbia. “Landlords might be thinking, ‘Renters made huge dollars over the last four years and I didn’t raise rent.’ But some renters are paying 10 percent less this year, and rents probably need to come down about 25 percent if renters want to meet their budgets.”

FCS Financial provides financing to farmers across most of Missouri. As executive vice president of operations, Jeff Houts is in a good position to see what’s up with rent prices.

“The information we’ve received indicates a softer overall market,” Houts reported. “Lower productive land certainly has softened, with location being a key variable. There is a distinction between cropland and established pastureland.” But, he added, rent prices tend to lag behind changes in land purchase prices, and rent reductions have been limited.

HOLD ON TO WHAT YOU’VE GOT

Farrell reports another trend—most tenants want to maintain control of the land they lease. “While a few operators did not secure financing and let property go last spring, we saw little tenant turnover for 2015,” he said.

In addition, landlords aren’t selling. “The volume of land sales in the overall market is down at least one-third from a year ago,” Farrell said. “Most land sales at this time are due to life events like death of a parent. The great majority of landowners are holding on to the land.”

Massey explains why most owners want to hold tight. “Farmers are aging, but compared to other professions, they are loath to retire,” he said. “Eventually, when they slow down, many rent out the land rather than selling it—rental income can make for a nice retirement. The land isn’t usually sold until the owner dies, as paying taxes on capital gains earned over the years would be a big financial burden. And most farmers feel more comfortable owning land than with the stock market—over the last 10 years, land has paid off.”

ADVICE FOR TENANTS

We asked the experts to offer advice on how tenants can negotiate favorable rental prices this fall, when most deals will be struck for 2016.

“The best advice I can give is communicate early and often,” Farrell said. “Don’t wait until winter to discuss concerns or plans. Be up front. Also, be realistic and don’t overplay the situation. Understand that landowner costs have gone up substantially in many states due to tax increases.”

True to his banking roots, Houts recommended getting your ducks in a row. Start by understanding your individual situation from the financial and operating points of view. This should form a basis for understanding your potential margins. Having the facts in hand will prevent you from getting too emotional while negotiating.

Gerig warned that competition may be tight. “In north central Iowa, we have no vacancy rate when it comes to good farmland,” he said. “There’s always a long list of operators wanting to lease what’s available. If you want to rent land, you need to keep your name out there and share detailed information on your operation with landlords and land managers.”

To succeed in the art of negotiation, Massey said tenants should keep in mind that it’s difficult for landlords to lower prices—it’s a phenomenon that social scientists call “loss aversion.”

“But if a renter offers a service that makes it worthwhile, lowering rent prices might be easier for the landlord to swallow,” Massey said. “For example, the renter might realize he’s got more time than money, and offer to remove a dilapidated barn from the landlord’s property in exchange for a rent decrease. Many landlords are older, and no longer have the ability, equipment or resources to tear down a barn.”

Massey confirmed the concept recently when he met with two different groups of 100 farmers each; both groups included a mix of renters and landlords. He asked attendees to respond to questions about negotiating rent prices using hand-held clickers to indicate yes or no. “I found that if renters offer a service to offset the lower rent amount, it should work,” Massey said. “The landlord is thinking, ‘I need to be compensated for the land, but it doesn’t always have to be in dollars.’”

Massey doesn’t know if this type of negotiating is occurring, but he thinks it’s worth a try, since most landlords don’t want to accept as much of a decrease as renters are asking.

ADVICE FOR LANDLORDS

Since Farrell manages farmland, he sees the landlord’s point of view as well as the tenant’s. “Landowners need to have a good handle on what they own and how it compares to other properties in the area,” Farrell said. “They also need to have a good idea of what overall income their property can generate. That’s a starting point for a fair lease. We know that operator margins are compressing and there will be pressure on rents.”

Houts suggests that landlords make lists of the most important factors they’d like to see in a tenant. “Weigh the short-term versus long-term issues relative to continuity and care for the land,” he said. “Stay aware of costs and margins typically available, and establish expectations with those values in mind.”

Massey offers a couple final pearls of advice for landlords and tenants: Do a little research—ask your neighbors what people are paying per acre for cash rent. And get your lease in writing.

Farrell parts with this closing thought: While lower land prices seem to be pushing down rent prices, the opposite can also hold true. “Lower rents will eventually pressure land prices downward as well,” he concluded.