Auction Sales

It’s a Cash Rent Bidding War

Interesting article from DTN and The Progressive Farmer

Put cash rent on the auction block and normal, rational farmers act like they’re buying a Picasso, not the rights to farm a piece of flood-prone or sandy soil for only two years. That was DTN’s Elizabeth Williams’ impression after attending a weekend cash rent auction in Mason City, Iowa where many of the 300 people attending ignored blizzard warnings to observe a new phenomenon for Iowa: the public rental auction. (See her story today in Top News or on the Farm Business page).

As Elizabeth reported, several parcels brought $520 per tillable acre, but most of the winning bids ranged from $425 to $490. Several farms came with warnings that they were rated a crop insurance risk and paid surcharges for coverage. So by all accounts, that denotes a huge premium given that USDA surveys show farmers in Iowa’s most expensive cash rent county only paid an average of $235 an acre in 2011, according to USDA. (Keep in mind that “average” factors in below-market rates charged by elderly grandparents and other blood relatives.)

A handful of landlords also solicited renters this winter by posting newspaper ads asking for bids on their Iowa farms. One of my Iowa friends–a loser at $465 an acre in the newspaper auction battle–thinks they can make high rents pay if they have long-term leases and reap the benefits of being able to spread hog manure (a potential $75 value versus the commercial stuff). Cash grain operators have trouble competing.

Those rents are too rich for Adam Erwin, DTN’s in-house columnist and a 10,000-acre, all crops Midwest farmer. If soybeans only average $11.50 this year, he’d barely make enough money to cover rent and input costs–leaving no margin for error on yields, he argues. If he grows corn, he’d have to consider what happens if a trendline yield and the largest planted acres since World War II conspire to produce a 13.8 billion bu. corn crop come fall.

Convulsive commodity prices bear a lot of the blame for this new landlord romance with cash auctions. Cash rent landlords felt left in the dust if they negotiated their 2011 rents too early in the summer of 2010. Between July 2010 and July 2011, potential revenue per acre on a typical Illinois corn farm swung at least $600 an acre. The land contracts of yesterday weren’t meant for that volatility.

Adam authored a pair of persuasive articles this week condemning flex leases for actually raising his risks, not sharing them (see “Bent Out of Shape by Flex Leases” in Farm Business). I’m sympathetic given that some leases carry unnecessary complexity, but that’s not the case with every formula. You can use an FSA posted county price, which is posted online daily and needs no calculation. You can use your crop insurance yields, which you have to report anyway. Most landlords want a bonus in a great year, not to lick up all the crumbs. To me, a fair flex lease is far preferable to a renter promising $500 up front at auction and paying the consequences later. Any dissenters want to comment?

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Read More at DTN and The Progressive Farmer