By Murray Wise
Note: This post is based on comments I made in a recent series of presentations for AgriGold. I’m grateful to my friends in this superb company for the opportunity to discuss global trends in agriculture.
Most of our day-to-day conversation lately has addressed short term questions. How big will the harvest be? What does the future hold for commodity prices? What’s the direction of land prices and rents?
Those are natural questions, especially this time of year when the harvest is taking shape. But most of these are factors over which we have little control in the short term.
So let’s talk about what we can control: Rent. Specifically, rental agreements based on commodity prices that no longer exist.
So who makes the first move? You do, no matter whether you’re the tenant or landlord.
If you’re a farmer, your landlord will appreciate your raising the subject, because he knows that in the long run, his returns are based on your success. If you’re struggling because of cash rents that reflect $5 or $6 corn and you’re looking at a significantly lower price for your crop, you face some tough decisions. You might find it necessary to stop farming land on which you can’t turn a profit, and the landlord could lose a tenant as a result. Having “the conversation” gives you a chance to avoid the worst alternatives.
But if you’re the investor and you haven’t heard from your tenant, it may be a good idea for you to start the conversation. You know what your tenant is paying, and if you’ve been paying attention to commodity prices (as you should if you own farmland), you have a pretty good idea what he or she is up against. While we all want to get the highest return possible on our land, we have to balance our short term interests with longer term realities. And let’s face it: Even in a market like this one, farmland is paying better returns than a stock market that’s gyrating 3 percent or more in a single day.
So it’s time to negotiate. Maybe it’s in the owner’s best interest to offer a lower cash rent. But this may also open the door to some new, creative ideas as well. For example, the owner might offer a lower rate in exchange for a portion of the crop — an arrangement in which the landlord would share some of the farmer’s risk and reward. There are several ways of skinning this particular cat, but they all have to lead to the same place: A sustainable agreement under which the farmer and investor alike earn a satisfactory return.
Note that no two situations are identical. Some tenants may also be farming land that they own, with little or no debt, and they’ll still make money in 2016. That’s great, but it’s still best to address it head-on. Otherwise, the tenant might walk away from the less profitable high-rent land at the earliest opportunity and choose to have a smaller but more cost-effective operation.
At the other end of the scale, we have farmers whose problems extend beyond the rent they’re paying. By historical standards, farmers in the aggregate still have healthy balance sheets. But while many have taken advantage of the series of good years to lower their debt and prepare for challenging times, others have borrowed more than they should to buy farm machinery and fancy trucks they don’t need. That can drag down the entire operation, and it’s not the landlord’s job to fix that. Even so, I’m confident that most negotiations can lead to a satisfactory result.
As I said at the outset, there are things we can’t control. But if we work together and forge agreements based on current realities, we can ensure that we’re all here and in shape for the good times that will surely follow the current market.