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Thursday, July 26, 2012

The Drought Has Destroyed Your Crop, How Will You Pay Your Cash Rent?



 

How is the drought going to affect the relationship between farm land owners and farm operators?  Over 100 million acres of cropland has been impacted by the drought and large percentage of that is operated by someone who is not the owner.  Have rare events such as drought been factored into leases?  Does your cash rent have any yield adjustment in it?  Will the drought cause the landowner to seek another operator if you cannot pay the rent installment?  There are a lot of issues that need to be addressed, and it will not be easy.
 
As the USDA releases its estimate of higher food prices resulting from the drought, there is no doubt there will be a national economic impact from yield losses that will range from none to 100%.  But individual farms will be impacted only in ways that the farm operator and his or her family know.  While input costs may total more than rent, rent could be 25% to 50% of the cost of production.  
 
<b>There are two scenarios, in which problems may be minimized:</b>1) Operators with high levels of Revenue Protection crop insurance that will cover crop production costs.  They will likely not have any problem making any final rent payments for the current year and the initial installment in 2013.
2) Operators with flexible cash rent that adjust rent to either yield, price, or both.  With a flexible rent that is calculated by either yield or price and yield, but not price alone, the operator should have some protection.
But there is another scenario in which problems will be maximized:
1) Operators who have fixed cash rent.  That is not at all unlike someone who just paid a record local price for farmland and needs to make a mortgage payment by the end of the year.  The inflexibility of rents and mortgage payments may eat away at equity or cause additional borrowing  from banks that may already be stressed by many of their clients seeking financial relief from the drought
 
<b>So what does an operator do who cannot pay scheduled cash rent payment? </b> Addressing this issue results in more questions than answers.   In all honesty this topic was posed by a frequent reader of Farmgateblog, a land owner, wanting to know what other arrangements might be considered.  “ERH” wrote, “As farmers struggle through the heat and dry conditions in Illinois, absentee landlords who live out of state are also struggling with questions such as:
1. How do we protect ourselves against farm rental income loss in disasters such as the current drought?
2. How will the drought and heat impact cash rents already established for 2012?
3. How will the drought and heat impact next year's negotiations for farmland leases in 2013?
 
As you can see, a landowner who has taxes to pay and may need the income for living expenses, will be in a similar predicament as operators who need commodity income to pay production costs and rent.
 
Instead of Farmgate providing answers and help, this is a solicitation for answers, ideas and suggestions that other farm operators might use in their approach to the issue of rent that will be difficult to pay.  <b>Will you:</b> 
1) Seek help from a lender to pay rent that is due?
2) Try to negotiate a longer period of time to pay the rent that is due, increasing your rental rate obligation and amortizing it over several years?
3) Give up the land?
4) Split whatever crop can be harvested with the landowner and sign an IOU for future payment?
5) (your idea)
 
Too soon you may have to negotiate a cash rental agreement for 2013.  How will you approach that? <b>Will you:</b>
1) Propose no change from the current lease, hoping 2013 will bring rain and a bumper crop that you already have priced?
2) Seek a substantial reduction in rent for 2013, and if so, will you jeopardize your tenure on that farm?
3) Propose a flexible cash rent lease that may be a year to late, but let’s try it anyway?
4) Propose a crop share lease that splits the production costs and the income?
5) (your idea)
 
<i>Your suggestions and ideas are invited, and identities will be protected.  Your idea may help many other farmers who are in the same situation.  Please contribute.</i>
 

Posted by Stu Ellis on 07/26 at 09:49 PM | Permalink

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