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Lay Groundwork with Your Landlords Now

Finance First

Prepare today in case you need to negotiate cash rent in the future

Published on: June 10, 2013

If you're like most farmers, renting farmland is your largest expense. It's where you make a lot of important decisions that affect your farm's profitability. And we're seeing some historically high rents now. But I think it's becoming more likely that high rents will have to change – perhaps in the near future.

Remember when most land was farmed under crop share agreements? That usually went well for farmers – because it didn't place all of the risk on them. Then things moved more toward cash rent. You started having to pay a higher premium for rental ground. I talked recently with an ag banker who said that rents seem to be very market-driven today, perhaps based more on the market than on actual economics.

Prepare today in case you need to negotiate cash rent in the future
Prepare today in case you need to negotiate cash rent in the future

So far, rents have always been negotiated upward. Farmers haven't needed to talk about negotiating rents downward with landlords. I think this is something we're going to need to learn to do – and we may need to learn fast.

Start planting seeds of these ideas now with your landlords. You've got to warm them up to the reality that grain prices could return to lower levels. Talk with them about taking another look at your cash rent.

SEE ALSO: Know Your Numbers When Making Cash Rent Decisions

Ask them if they think commodity prices could go down to lower levels. Show them what that would look like from a financial standpoint in your operation – one day it may no longer be profitable for you to farm that land at your current level of cash rent. There are some high cash rents out there that won't pencil out if commodity prices sink.

If you wait until prices are at lower levels – it will be too late. Someone else will have already talked with your landlord and he'll pay whatever the landlord wants. That farmer probably has no idea where his numbers are or what it will take for him to be profitable. He's just thinking about trying to get ground, at any cost, with any landlord he can get. And you'll lose that land to him.

Preparing the landlord should go hand in hand with continuing to build the relationship and reminding him of the value that you have brought in the past. How are you taking care of the ground to create value for the owner? What other things do you do for the landlord because of your relationship?  Relationships with your landlords need to be rock solid. When the relationship is strong, they won't want to hang you out to dry for their own survival and profit. They'll want to keep working with you.

Most farmers have not needed to negotiate rent downward. The key is laying the groundwork now – planting the seed – to ensure that you have solid footing if you need to negotiate with them in the future.