By Donnelle Eller,
Faced with declining profits, some Iowa farmers are defaulting on cropland rents — a largely unheard of move given the intense competition for the state’s fertile farmland and a sign that financial pressure and debt are mounting.
With farm real estate debt across the United States at its highest levels since the farm crisis years of the early ’80s, farmers are increasingly nervous about trying to turn a profit while paying sky-high rents.
As a result, more growers are severing ties on rented land that some have farmed for decades — and they’re doing it with the spring planting season nearly upon them.
Most farmland rent payments were due March 1, with spring planting typically starting in mid-April.
“Some farmers went in to renew their line of credit and found out that the bank wouldn’t extend credit to them.”Steve Bruere
“We had someone call today and say ‘Don’t cash that check right away,'” said Mark Gannon, owner of Gannon Real Estate & Consulting in Des Moines, on March 1. “Another farmer called, wanting to renegotiate their lease. … There’s some stress out there.”
Farmers tell managers and landowners that bankers are tightening credit, with growing losses and dwindling reserves built up during farming’s boom driving lending decisions, experts say.
“Some farmers went in to renew their line of credit and found out that the bank wouldn’t extend credit to them,” said Steve Bruere, president of Peoples Co., a Clive land broker and farm management company. “Producers are coming back and saying the cash flows just don’t work.”
U.S. farm income in 2016 is projected to fall for the third year in a row, with farmers squeezed between tumbling corn and soybean prices and stubbornly high costs for land, seed, fertilizer and other inputs needed to grow a crop, experts say.
Grain prices have sunk 50 percent or more since 2012, when drought drove prices to record highs.
“Last year was a tough year, and this year will be another tough year,” Bruere said. “If you have the ability to withstand losing money, the banks will work with you.
“But if you don’t, they’re starting to come down on some folks.”
Farmers have scrambled to cut costs, including rent for farmland that grew with skyrocketing commodity prices.
Statewide average cash rents in Iowa reached $270 per acre in 2013, a 53 percent spike over five years and more than double rents a decade ago, Iowa State University’s annual surveys show. In the past two years, rents have declined nearly 9 percent.
Why rents remain high
Dermot Hayes, an ISU agricultural economist, said land rents and other costs need to drop more, given where commodity prices have landed.
“Cash rents haven’t declined in proportion with revenue,” he said. “That adjustment needs to occur.”
Among the reasons land prices have been slow to fall: Farm equipment is sized to a certain number of acres, so farmers are hesitant to drop land. Shrinking the number of acres increases a farmer’s fixed costs while cutting revenue.
And once land is lost, it’s nearly impossible to get it back.
“Tenants are loath to lose a farm,” Hayes said.
Some farmers had been willing to subsidize rented land with cash reserves, he said, hoping commodity prices would rebound.
But that hasn’t happened.
U.S. farm income is projected to fall to $54.8 billion in 2016, the lowest amount since 2002, and a 56 percent drop from a high of $123.3 billion in 2013, according to the U.S. Department of Agriculture.
Iowa farm earnings took a similar dive in 2014, the most recent data available, falling 46 percent to $5.1 billion from $9.6 billion in 2011, a recent high.
So far, the percentage of farmers who are struggling with cash rents “is relatively small,” said Nathan Kauffman, an economist at the Federal Reserve Bank of Kansas City.
“But if we continue to have an environment like this for another year or so, there will be a larger group of producers who will buckle under the weight of the downturn,” Kauffman said. “It will become even more intense.”
Rising farm debt
Nationally, farm debt levels are rising as the economic slump continues.
Real estate farm debt is expected to hit $185 billion this year, inflation-adjusted USDA data shows. It pulled back slightly from 2015, the highest levels since 1982, near the start of the 1980s farm crisis.
The farm crisis remains Iowa’s worst recession in history after the Great Depression, with the unemployment rate reaching a record 9.1 percent in 1983.
U.S. non-real estate loans, such as operating notes, have climbed to an estimated $148 billion this year, a signal that cash reserves are being depleted. It’s nearly 2 percent over last year and a 25 percent increase from a recent low of $118 billion in 2012, USDA’s inflation-adjusted data shows.
The increased loan activity indicates “credit has not been curtailed,” USDA said.
Despite growing debt levels, Kauffman said other financial measures, such as debt-to-asset ratios, look healthy.
That’s been helped by continuing strong farmland values. In Iowa, values have fallen 12.4 percent to $7,633 an acre last year, from a peak of $8,716 in 2013.
There’s reason to be cautious about the expansion of debt. It shows that pressure is building,” said Kauffman, who is based in Omaha. “But farmers are servicing their loans,” with low default rates.
Dale Kooima, president of Peoples Bank in Rock Valley in northwest Iowa, said lenders are working with clients to restructure short-term debt to mid- and long-term debt. That frees up cash they can use to help work through the downturn.
“To me, it’s a cash-flow challenge,” he said.
Suffering commodity prices
Even with strong yields across much of the state last year, Bill Northey, Iowa’s agriculture secretary, said some farmers are struggling to repay loans.
“Things are going to be very tight,” Northey said. “Most will get financing, but I’ve heard from a few bankers who have say that some folks won’t get financing — or won’t get financing” for the same-sized operation.
“When commodities were last this low, land costs, seed costs, even machinery costs were a lot lower,” he said.
Kooima said losses for corn and soybean growers are being exacerbated by a downturn for livestock producers. Cattle producers have struggled to post a profit, while pork producers have seen mixed results, he said.
“The livestock guys have had their share of losses. 2014 was probably one of their best years, and 2015 was probably one of the worst,” he said.
Some farmers are selling nonessential equipment to raise cash, said Northey and Kooima.
No repeat of farm crisis
Still, this downturn is unlike the 1980s farm crisis, say Northey and others.
Iowa farmers and investors purchased land with healthy down payments, limiting how much they’re leveraged, experts say. And interest rates are significantly lower.
Farmers in the 1980s were paying rates as high as 20 percent, Northey said.
“We still have solid demand,” he said. “We’ve just had some big production years — back to back.”
DATABASE: County-by-county look at farmland cash rents
Now farm managers and landowners are scrambling to find growers for land with leases that have fallen through.
Jim Freeland, who owns and manages land in southern Iowa and northern Missouri, said he lowered rents about 35 percent over the past two years on his five farms.
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