December 24, 2008

Economist: Recession adds uncertainty to 2009 farmland leases

Farmland owners and their tenant farmers might have to negotiate longer and harder to come up with a mutually acceptable rental rate for the 2009 crop season, Dobbins said. He urged renters to do their homework before entering into negotiations, especially if they plan to reopen existing rental agreements.

"Will cash rents come down? That's a big question," Dobbins said. "At this point I'm not so sure that we're going to see much of a decline, but I would expect that the increase we thought was going to occur last summer certainly isn't in the cards, either.

"This coming year may be the year where rates are pretty flat in terms of changes. The stories about people paying $250 to $300 an acre in cash rents don't seem to be nearly as viable today as they did six months ago."

In recent years both landowner and farmer have profited handsomely from high commodity prices. As a result, average cash rental rates for all classes of Indiana cropland jumped 12 percent to 13.5 percent in the year ending this past June, Dobbins said. Rental rates for the most productive land averaged $194 per acre, while the least-productive land fetched an average of $123 per acre.

Farm profits began to erode when the economic slowdown set in this fall.

"In September if you used the futures market to give you an idea of what prices might be in the fall of 2009, and you subtracted your production costs for corn and soybeans, you would have wound up with a margin of roughly $300 an acre from a corn and soybean rotation," Dobbins said. "By the time harvest was over in October or early November, the price declines that we had for corn, soybeans and wheat had dropped that margin to about $200 an acre."

Prices are still falling, lowering profit margin to an estimated $145 per acre, Dobbins said.

"So the decision that might have been made in September to pay cash rents in 2009 of $180 to $200 an acre and still have something left over - well, today there's nothing left over and a farmer is in the hole," he said.

Farmers should carefully calculate both production costs and projected revenue when estimating margin on the 2009 crop, Dobbins said. That information is valuable when negotiating cash rents, he said.

"One of the things that they want to do is prepare themselves to have a conversation with their landowner about their financial situation," he said. "They need to have budgeted through what they expect their returns to be on a farm-by-farm basis. It's worthwhile to share some information about their costs, how they see their return situation shaping up and letting the landowner know what the margin is potentially going to be for the next year."

As it stands now, farmers might need to cut costs wherever they can, in order to make the numbers add up, Dobbins said.

"For instance, now is probably not the time to be thinking about a fertility building program," he said. "Producers also might want to look at no-till systems, to cut down on trips across the field. And they can save money by making sure seeding rates are at the proper levels for the yields they are expecting."

Landowners should be aware that market conditions have changed dramatically and likely will affect rental rates.

"They need to understand that owning Indiana farmland has become more risky," Dobbins said. "They will probably face more fluctuations in returns from their land."

For more suggestions on negotiating cropland leases in tough economic times, including creating flexible cash rent agreements, read "Establishing a Cash Rent in an Uncertain Economic Environment," by Dobbins and fellow Purdue agricultural economists Luc Valentin and Alan Miller. The paper is available online at https://www.agecon.purdue.edu/news/financial/leases_final.pdf .

Writer: Steve Leer, (765) 494-8415, sleer@purdue.edu

Source: Craig Dobbins, (765) 494-9041, cdobbins@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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