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Uncertain conditions on the horizon as landlords, tenants consider 2014 lease agreements

By Jean Caspers-Simmet

Date Modified: 09/23/2013 9:33 AM

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WATERLOO —As tenants and landlords consider lease arrangements and rental rates for next year, they face some uncertainty, said Kristen Schulte, Iowa State University Extension farm business management field specialist.

Speaking at a recent farmland leasing meeting at Hawkeye Community College in Waterloo, Schulte said the 2012 drought became the 2013 spring deluge with producers in northern Iowa unable to plant some of their acres.

"I was doing drought meetings last fall, and this spring I was answering questions about crop insurance and prevented planting," Schulte said.

She wonders if livestock producers will be able to find the feed and forage they need at affordable prices in areas with a large percentage of prevented planting acres.

"They have some challenges for the coming year in terms of feed inventory," she said.

The weekly National Agricultural Statistics Service crop condition reports show that intense heat and dry weather the end of August caused corn to decline from 51 percent in good to excellent condition Aug. 4 to 39 percent on Sept. 1.

While heat allowed crops to mature, they still are behind compared to the five-year average. Soybeans were rated 8 percent very poor, 16 percent poor, 37 percent fair, 34 percent good and 5 percent excellent on Sept. 1.

The Aug. 27 U.S. Drought Monitor showing abnormally dry conditions in northern Iowa, severe drought in the west and moderate drought in other parts of the state.

"A real concern is when will we have the first frost," Schulte said. "I'm hoping that since everything else has been late this year, we'll have a late frost, but I don't always get what I wish. If we have an early or even on-time frost there are concerns that we will be spending more dollars to dry wet corn."

The weather may affect farm lease considerations because weather affects crop revenue, Schulte said.

"I encourage landowners and tenants to communicate about potential problems," she said. "If your landlord lives out of state, it is good to use photos to tell the story."

As tenants and landowners look ahead, unpredictability is on the horizon. More corn than ever was planted and even with weather issues in Iowa and some surrounding states, Illinois, Indiana and Ohio crops look good. A record crop is likely and that is pulling down prices. USDA is projecting a national average corn yield of 154.4 bushels and a soybean yield of 42.6. USDA estimates national season average cash prices for 2013-14 of $4.90 for corn and $11.35 for soybeans.

Margins will tighten with lower crop prices. Non-land crop costs have increased. Estimates for 2013 for soybeans after corn are $272 per acre, corn after soybeans $501 and $555 for corn after corn. Mike Duffy, ISU economist, estimates 2014 cost per bushel at $11.40 for soybeans after corn, $4.43 for corn after soybeans and $5.17 for corn after corn, pushing up costs about $10 per acre.

"The past few years we saw some good margins, but the 40-year average profit per bushel on corn is five cents," Schulte said.

Average cash rent for row-crop ground was $283 per acre in northwest Iowa, $294 in north central Iowa, $281 in northeast Iowa and $297 in central Iowa in ISU's 2013 Iowa Cash Rent Survey.

"The purpose of the cash rent survey is provide information to tenants and landlords to use as a starting point for estimating a fair cash rent," Schulte said.

Other considerations when establishing cash rent are fertility and drainage issues, the size and shape of fields, USDA program bases and yields, seed contracts, local grain prices and basis, manure application contracts and longevity of leases, Schulte said.

"There may be a value placed on a tenant who plows the snow or checks up on the landlords each week because their children live out of state," Schulte said. "The landlord needs to consider what that is worth."

Conservation practices, land use repair and improvements, soil fertility and yield and application records are other considerations.

If tighter crop margins continue, land values will make an adjustment, Schulte said.

"I don't think they will drop quickly," she said. "They will be sticky, but from an economist's standpoint, some high cash rents will need to be adjusted downward in order for producers to be profitable."

Landlords and tenants need to watch interest rate increases and how that affects the economy, Schulte said. What will happen with the farm bill is unknown, but the percent of crop insurance coverage a producer can buy may decrease, Schulte said.

Flexible cash leases are a way to more equitably share the risk between tenants and owners, Schulte said. With a flexible cash lease, the rent is paid in cash and is determined by a formula that includes actual price, actual yield, costs of production or a combination of the three.

"Fewer landowners and tenants want to be involved in crop share leases, but they recognize there is a need for some risk sharing," Schulte said.