It ought to be a great time to farm. Modern technology has removed many of the risks from weeds and pests. Crop insurance covers disasters. Now the $180 billion 10-year Farm Bill provides long-term income security.
So some farmers may rush out to rent more land to take advantage of their good fortune. After all, how could they lose? Well, odds are that some of them will go broke.
Here's the problem: Some farmers want to plant all the land they can in order to take advantage of the Farm Bill. That works well when they own all the land they farm. But half of America's corn and soybean land is rented.
Competition among farmers to rent that land is driving up rental rates, says Robert Ratliff. He's head of profitablefarming.com, a business planning firm based in Raleigh, NC. Farmers face a similar problem if they want to buy because farmland prices have also risen.
The problem is likely to get worse as existing rental agreements expire; landlords can raise rents for future leases, Ratliff says. The danger is that rental farmland may prove unprofitable.
In the worst-case scenario, losses from rental properties could sink an entire operation, Ratliff says.
Farmers can do two things to avoid disaster. First, make sure renting land makes financial sense. Ratliff suggests that farmers post relevant financial numbers on bulletin boards. Then look at the numbers for three days running to see if renting still makes sense. “You've got to know when to say ‘No’,” he says.
Second, farmers should seek leases that make the landowners share financial risks if prices or yields fall, suggests Jonathan Norvell, who manages farmland owned by the University of Illinois. One way to do this is to set up a flexible rent that reflects actual crop revenues and yields.
Norvell adds that he thinks Farm Bill cash hasn't necessarily driven rental prices up, but it has kept them from going down. “Because commodity prices have gone down, you would expect farmland to go down in price. But the presence of government programs has kept prices from falling.”