For many farmers, land costs are one of the highest budget line items for their operation. Before you ask for a reduction in your cash rental rate, know your overall cost structure, suggests Tim Koch, chief credit officer for Farm Credit Services of America. Then you can use that information when you meet with your landlords to discuss 2019 rental rates.
“Transparency is key,” Koch says. “If landlords understand your cost structure, then they can understand how that variation in rents impacts your breakeven cost and profitability.”
Typically, cash rents follow real estate values. But, cash rents lag on the way up and way down, Koch says.
“Real estate values in the last 12 months have stayed pretty stable,” he says. “So. we’re likely to see some stabilization in cash rent values as well.”
This means, these discussions won’t get any easier. Start these conversations soon, as Sept. 1 is the annual renewal (or termination) date for farmland leases in most states.
Also, use this time before harvest to create a 2019 budget, so you can make smart decisions around your crop mix, machinery maintenance costs, family living options, etc. Understand your overall cost structure, so you can know where to make modifications.
“Most of the easy adjustments for producers have been made,” Koch says. “As this cycle has continued to drag on, the options to make adjustments become more difficult.”
You’ve likely realigned your debt structure and extended your amortization periods. So now it could be time for tougher decisions.
“You may need to sell a farm to de-lever your balance sheet,” Koch says. “Or add off-farm income, if that’s an option.”
To ensure your production costs are under control, Koch suggests benchmarking them against multiple data sets, such as university numbers and your farming peers. Then you can see areas to improve.
Also, communicate with your lender about your profit expectations for the upcoming season.
“Communication between a lender and a borrower is always critical,” Koch says. “But in today’s times with more compressed profit margins, communication becomes more critical.”