Rent squeeze could push some farmers out of business

Rapidly declining corn and soybean prices are sparking difficult discussions across Iowa about how much growers should pay to rent farmland next year, experts say.

Those negotiations could make or break farmers' future bottom lines.

Some farmers already may be looking at losses this year, with a record harvest driving corn prices down nearly 40 percent.

It's unlikely corn and soybean prices will rebound within the next year or two, pinching farm profits, Chad Hart, an Iowa State University farm economist, has said. It could push some farmers into the red — and push some of them out of farming.

"The economics of farming have changed significantly," said Steve Bruere, president of Peoples Co., a Clive farmland brokerage and management company. Corn prices have plummeted 60 percent over the past two years after pushing to a record of more than $8 a bushel.

The shift has broad ramifications for Iowa's economy. Already, Deere & Co. has announced it will lay off nearly 1,000 workers at plants in Iowa. The Illinois-based maker of tractors, planters and combines warned last month that global farm and turf sales are expected to fall about 10 percent for the fiscal year.

The sales slowdown has trickled into used farm equipment as well, with iron piling up on dealers' lots. A Midwest economic report this month said some farm equipment dealers in Minnesota have started to close their doors.

U.S. farm income is projected to drop 14 percent to $113 billion this year, the lowest level in four years, the U.S. Department of Agriculture reported. In Iowa, annual farm income fell 15 percent to $9.3 billion in 2012 from a record in 2011, the data show.

As commodity prices soared in recent years, costs also rose for seed, fertilizers and other expenses. Average cash rents for Iowa farmland nearly doubled over the past decade to $260 an acre this year, even after shrinking nearly 4 percent from 2013, an ISU survey shows. Last year was the first time the overall average rent dropped in over a decade.

Where rent cuts have occurred this year, they've been around 10 percent, Bruere said.

With current rents, math 'doesn't work'

Loyd Brown, president of Hertz Farm Management in Nevada, Ia., said he's seeing some landowners take a "wait- and-see-attitude," holding steady on rents for next year.

He said farmers should have some economic strength going into next year, since many took advantage of the opportunity to pre-sell crops in the spring, when corn prices were closer to $5 a bushel and soybeans were more than $11. "The range has been zero to 10 percent reduction," Brown said, but "more typical might be a 5 percent decrease."

Even a 10 percent decline in rents might not be enough for some farmers to be profitable next year, Bruere said. Here's why: The futures market, setting prices for corn next fall, is pushing around $3.50, Peoples Co. estimates.

An average farm, yielding 170 bushels of corn per acre, would gross about $530 an acre, but spend an average of $340 to grow a crop. That leaves $190 per acre for rents and a return to the farmer.

Based on this year's average rents, a farmer could lose about $70 an acre. "It just doesn't work," Bruere said.

"If you pay aggressive rents and don't market correctly, it will be a challenging year," he said. "There's no room for error."

But farmers also are also reluctant to give up renting acres for fear they'll never farm them again.

Bruere said it's the first time since the 1980s, when the farm crisis crippled the state, that he's seen Iowa farmers break leases. Traditionally, landowners terminate leases each September, a move that enables owners to raise rates.

Farmers might be willing to pay higher rents, Bruere said, taking a chance that commodity prices will rise next year — a possibility, depending on issues such as weather and supply and demand, both in the U.S. and across the globe.

"They're gambling that we'll get a better price at the end of the year," Bruere said.

Strong prices for cattle and hogs help support higher cash rent prices as well, said Dave Pluim, owner of Field of Dreams Realty in northwest Iowa.

Farmers need crop acres for spreading manure coming from their livestock operations, said Pluim, based in Hull. "That drives the rents more than grain prices" in the livestock-heavy northwest.

Costs for fertilizer, seed also have risen

Hertz's Brown said rent increases lagged behind commodity prices as they rose and will lag coming back down. Plus, rents never fully reflected high-priced corn or soybeans, he said.

Steven Johnson, a farm management specialist with Iowa State University Extension, said farmers will push hard to cut cash rents because they are among growers' largest costs and one of the few places they can trim. Other large costs like fertilizers or seed provide little wiggle room for reductions.

Farmers should see lower costs for fuel, crop insurance and other areas. Overall, "we don't see costs dropping much, maybe 5 percent" for 2015, Johnson said.

The squeeze between declining revenue and high costs will create cash-flow problems next year, he said. But balance sheets, reflecting the value of assets, will likely remain strong, in part because land values have remained high.

Farmland values hit a record high last year, rising 5.1 percent to $8,716 an acre, based on an ISU survey. But other more recent surveys show land prices are beginning to soften. One this month showed an 8 percent decline in high-quality land when compared with a year ago.

Farmland has been a safe haven for investors, Brown and Bruere say. And demand has remained strong, given that farmland often only changes hands once in a generation.

But Bruere is concerned that farmland values — and the rents that come from them — can't hold up if commodity prices remain depressed.

Farmland experts have said they expect adjustments in farmland prices to be gradual. Unlike the housing bubble and credit crisis that led to the 2007 recession, U.S. farmland is not highly leveraged.

In the run-up to the recession, home buyers were often using 80 percent to to 90 percent borrowed money for their purchases, Brown said. "Even if farmers made a loan, it wasn't for more than 50 percent." And those loans have income that support them, he said.

Bruere said he sees commodity prices more closely supporting 2008 farmland values, about 50 percent lower than today's values. But he's unsure where farmland values will go, especially if interest rates rise.

"I don't believe that money will overpay for land consistently, and ultimately land values need to reconcile with the economics of current commodity prices," he wrote recently.

"Nobody likes to go backward," he said, "but we've had not only a tremendous three-year run, but we've seen a tremendous 20 years. We've never had to face this. Someone was always willing to pay a seller's price."

Donnelle Eller covers agriculture and energy. She can be reached at deller@dmreg.com or 515-284-8457.

60% decline in corn prices over the past two years.

14% decline in U.S. farm income projected for this year.

$260 Average cash rent per acre for Iowa farmland. The price has nearly doubled over the past decade.