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Cash Rent Reset - 3
Tuesday, September 1, 2015 2:50PM CDT

By Marcia Zarley Taylor
DTN Executive Editor

HADDONFIELD, N.J. (DTN) -- Farmer Kip Tom and his family make it a point to shower their 90 landlords with quarterly newsletters, a timely web page, photos, humorous posts on Facebook and Twitter, and an annual appreciation dinner with a fish fry, door prizes and farm equipment displays. This month they hosted more than 400 and capped the evening with a beekeeper for the kids and a speech by a university dean for the adults.

Appreciation and detail-oriented service have kept many of the Toms' landowners bonded for decades. But when it comes to the hard task of reducing cash rental rates, the 16,900-acre Leesburg, Indiana, operation is an open book.

Rental properties in their six-county portfolio sport a wide range of productivity and owner personalities. Some land partners are neighbors whose children were Kip's high school classmates. Some are elderly owners who value their rents paid on time and roadsides mowed. Others are out-of-state investors who require education about the farm economy. So, no one formula fits all. Yet, sharing personal financial details with landowners during stressful economic times helped to trim rental rates on farm leases in select cases near 10% when renewed in the past year, said Kassi Rowland, Kip's daughter, head of the family's land partner relations.

That's critical since Purdue University estimates 2015 cash rents in Indiana's northern counties ran $227/acre on average quality land, up about 182% just since 2005. High-quality properties brought $284/acre. Input costs have risen almost as much and neither they nor rents have budged much since the commodity crash two years ago.

"Thankfully we didn't lock ourselves into any of the crazy rents when prices were so high. We don't have to have the $100 conversation that some renter will have this year. That's a tough one to bridge," Rowland said. But rentals of any kind remain extremely competitive in northern Indiana, with landlocked dairies willing to bid aggressively for high quality soils. To secure land, the Toms prefer three- or five-year leases and must pay fair market rates to stay in the game.

It's not always easy. The Toms' high margin business is irrigated seed corn production, but those contracts were slashed about 40% in 2015 with the nation's cutback in corn acres. Meanwhile, season-average prices for commercial corn and soybeans have tumbled 48% and 35%, respectively, in the last two years.

To set the stage for leases that expire in 2016, Rowland and Derrick Deardorff, Tom Farms chief financial officer, visit each landowner personally, preparing a portfolio of information on their land. The binder includes contract terms, current lease, a tabbed section for Farm Service Agency documents, field maps and soil testing results. Then they hit the economics, drilling down to a profit and loss statement for each individual rental farm.

IS CURRENT RENT IN THE BALLPARK?

Step one is to show existing rents match market rates. The pair use three university models to show owners their cash rents already meet or exceed standards for fair cash rent in their counties.

Both Iowa State and Purdue University models calculate that cash rents are running about 2.9% to 3.5% of fair market land values on average. The Toms plug in current average county market rates for farms in the six counties they operate from AcreValue, a "Zillow-like" program available on Granular for select Midwest states. They compare that estimate to Purdue's annual farmland value survey released each August. By these formulas, a sample rent should run about $230 to $240/acre, based on current land values.

A second "fairness" formula used by Purdue assumes corn cash rents should run about $1.41/bu. of production.

A third formula measures how much a landowner could earn using a one-third crop share lease, based on gross revenue from expected yield and current future prices.

SHARE FARM SPECIFIC PROFIT AND LOSS

The second step is sharing analysis of profit and loss projections for the actual rental farm. Deardorff and Rowland use the agronomic and accounting program Granular to help them pinpoint their exact profits and loss down to each field, so they can avoid operation-wide averages for rent discussions. (Kip serves on its board of directors).

"It's helping us make better decisions and evaluate why some fields aren't performing," Deardorff said.

A few are on the radar for nonrenewals. "The bottom 5% probably aren't in our best interest to continue farming," he said. "It's a balancing act to be more efficient and leverage our overhead over as many acres as possible, but we don't want to build ourselves up for a loss."

Projections, not past history, are key. "We try not to look at 2015's performance," said Deardorff, a former investment banker and MBA grad who worked for Fortune 500 companies before being hired by the Toms. "We use only forward-looking variables when we're projecting 2016 returns, because we don't want to set ourselves up for a loss next season."

"To date, we have found transparency to lead to more productive conversations with landowners," Rowland said. If owners aren't as comfortable about lowering rents as much as Tom Farms thinks is necessary, they will add a flex rent provision that sets a pre-agreed upon bonus if commodity prices recover. About 10% to 15% of their leases include this provision now.

"This makes the conversation about reducing the rate easier," Rowland said. "When rent is more of a variable cost, it starts to benefit both parties. It shows how we can share on any upside."

MAGNITUDE OF CUTS?

Few Indiana cash leases are under the microscope yet, noted Howard Halderman, president of a Warsaw, Indiana, realty and farm management firm. Unlike Iowa where the state's rent notification deadline is September 1, Indiana's legal notice is December 1. Yields across the state remain erratic, so no one knows what their harvest or final crop insurance payouts will be, Halderman said. Still, he expects Eastern Corn Belt rents in excess of $300/acre to come down fairly substantially in 2016, maybe $50/acre.

"Rents in the $250-range will stay more status quo because of the competition for acres," he said.

Influencing discussions is the fact "some growers in the Eastern Corn Belt will have suffered more economic damage in 2015 than at any other time in their careers," Halderman added. "At least with the 2012 and 1988 droughts, higher prices offset the yield losses. This time, there's little price enhancement."

Yields in northern Indiana look good for the Toms, so it's only a price disaster that worries them for 2016. "Transparency has been more than good," Rowland said. "It helps owners see what we face on a day-to-day basis." So far, they've even added a few hundred acres for next year.

***

EDITOR'S NOTE: To read other installments in this cash rent series, see the Farm Business page or Recent Features.

Marcia Zarley Taylor can be reached at marcia.taylor@dtn.com

(ES/CZ)


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