
A shift is underway among operators and owners of farmland across the country that is directly impacting farm lease agreements. External financial factors (cost of machinery, capital, inputs, and labor) once thought to be “transitory” are settling more into reality as many cast their projections for the coming crop year. These factors are setting the stage for what may prove to be difficult conversations with long-term relationships and lease arrangements. Fairness from both parties at this inflection point will be key to future success.
Rising costs vs. diminishing prices
The financial headwinds of the preceding 24 months have lingered longer and, in some cases, cut deeper than operators would have hoped. As in many industries, the agriculture complex has experienced a nonlinear path from seed to when the finished product is delivered and priced. Many budgetary plans that appeared sustainable at the beginning of the growing season have instead ended shorter than expected, which has many searching for a path to financial stability.
Careful consideration of the following three points will be required by farmland owners and operators who wish to succeed through current and future challenges:
Finding fairness through clear communication. While not always easy, communication is the key to finding equitable approaches and long-term stability in farm lease agreements. Oftentimes, however, heightened emotions and individual personalities can distort the best way to express the true challenges or opportunities that are happening in real time. There can be no question that the land and its best productive capabilities are important to the operator and owner alike.
The genesis of a “fair look” will be consistent open communication based in trust. This trust is built over time and includes operators who may need to ask for reductions or modifications to rental rates during challenging times, but at the same time, extend commitment to consider increasing percentages and rental rates in more prosperous commodity periods. In all things, fairness begets fairness, which leads to durational success for leased farmland.
Farm lease balance. Some of the shifts that the market is currently experiencing include modification to traditional farm lease agreements. Fixed rate, cash rental, and crop share structures are being scrutinized in the market to find the right entry points to value. This scrutiny is based on financial and economic implications on the input cost side of production with the largest impacts coming to inequitable break-even points for a bushel of grain.
Current lease structures that are finding traction in the market now include an agreement with a reasonable base percentage that allows for flexibility and upside when commodity prices improve. This often includes percentage increases to production share based at certain price points for the commodity grown. For example, a 25% NET of production expenses crop share lease may be appropriate when local wheat prices are in the $5 (local price) per bushel range but could flex to 28% NET when grain prices achieve $6 (local price)per bushel or better. A further shift could potentially be included in the lease terms to allow room to reach a more traditional 30% NET level when the price point is at or above $7 (local price) per bushel, with each farm deriving its own starting point as well as variation for price thresholds.
The key is achieving a balanced approach that will provide more current market movements and achievable results that won’t cause production deficiencies or adverse impacts to the land.
Sustainable crop production processes. In challenging times, short term management decisions can start to impact long term sustainability of the land. The tendency may lead to an operator shortening the care of the farm either by reducing soil health activities, modifying crop rotation, or lessening crop protection protocols to find profitability.
Mom and dad always said, “When you take care of the land, it will always take care of you,” and that sage wisdom rings true in good or challenging financial times. Owners and operators of farmland have a moment to act in the best interest of the land.
As always in farming, NOW is the best time to ensure input decisions and leasing structures to allow for the dirt to continue to provide into the future as it has in the past. This is best achieved by encouraging fairness among the parties, balance in leasing, and sustainability practices for the soil.
Tim Cobb is a farm kid from Eastern Washington and is the owner of Farmland Company, based in Spokane, Wash. Farmland Company specializes in direct farmland management, real estate brokerage, and consulting across the Pacific Northwest. For more information, visit the company’s website at farmlandcompany.com.