The banging of drums beckons a tariff fight between the U.S. and China, and American farmland just might be the battleground. Considering China is among American farmers’ biggest customers, politicians on both sides of the proverbial aisle are promising to shield the Heartland from the potential impact of tariffs. That said, many would be wise to consider their long-term strategies with regards to the leasing of tillable ground, be it on a cash-basis, the traditional shares model, or a flex-model hybrid.
The leasing of ground is as old as the business of farming itself, and there are advantages and disadvantages to either model, most of which hinge on the value of grain or product being produced on the property, number of acres and other expenses involved. Larger operations and the landlords they serve need to consider the impact of pricing and global market strategies in negotiating these arrangements.
Why tariffs matter
Regardless of the crop grown, the agricultural market is indeed global. With President Donald J. Trump’s move in March threatening tariffs on more than $50 billion worth of goods imported from China, that nation is proposing retaliatory tariffs on some $50 billion in American goods, including agricultural. The stock of Deere & Company and fertilizer giant Mosaic has dropped nearly 4 percent since the announcements, and experts are understandably concerned about commodities themselves.
An April 10 report issued by Purdue University predicts that the discussed 25 percent Chinese soybean tariff on U.S. goods would, after five years, result in a 65 percent reduction in American soybean exports and U.S. global soybean exports might drop 37 percent. U.S. soybean production, the report predicts, would drop by some 15 percent, mostly from lower acreage employed. Purdue University estimates this could slash revenues for Indiana soybeans alone by around $150 million annually, or cause a 10 percent decline in the $1.5 billion of annual Hoosier farm income based on 2016 data.
These moves do in fact have the potential for long-term consequences as China is the largest user of soybeans on Earth, with the U.S. coming in second. But China only raises about 13 percent of the soybeans they consume, importing the other 87 percent, taking up about 65 percent of all global beans. The U.S. has heretofore supplied about 29 percent of all Chinese soybeans, selling about 1.2 billion bushels to that country for $12.4 billion in 2017 alone.
But what happens if China simply finds other sources, such as South American nations, or perhaps invests in potential growing partners in other parts of the world? What will this mean long-term for American crop prices, and in turn, the value of leased ground?
Share-cropping or cash-renting?
The difference in return and cost can be quite stark depending on the price of crops sold and other inputs. The majority of farm-ground in most states is in fact leased and cash-rent models are the most common agreement these days. A cash rent system is where a pre-determined rent usage — typically per acre — is established in advance, and all associated costs owed by the landlord are put in writing. This provides the farmer a fixed cost that can be computed into operating budgets well in advance of the season, and provides the landowner a known return to be expected. The downside is in a bad year, whether for prices of production, the farmer still has the same rent to pay, and in a boom year, the landlord gets no real benefit.
A crop share is a more flexible arrangement where the landlord and tenet actually split the crop itself, be it in a 1/3-2/3 model, half-and-half, or some other figure. This model can allow for various sharing of the input costs and associated upkeeps such as tiling and tree-trimming, and can be shifted from one type of crop to another, with different figures used for soybeans as opposed to hay. In a case where a landlord might own a grain silo, or would perhaps like to otherwise store their share of grain in anticipation of rising rates or use it for livestock, this might be an attractive option. The upside to this model is that both farmer and landlord succeed or fail together, year-to-year, and in this model, the upkeeps and fertilizer decisions may be made jointly with longer-term goals in mind.
The flexible-rent option is a third option where typically a base rent is established with some form of bonus or cost added in depending on ground performance or pricing. States such as Michigan have seen an upswing in this model in recent years due to increased prices for some crops, as landlords want more money for ground and farmers remain conservative in their concerns about tying themselves to a committed set rent.
And so, the discussed tariffs with China really do impact these discussions for many reasons. Consider the landowner’s dilemma. If she owns 100 acres that averages 50 bushels of soybeans, her one-third share would be 1,665 bushels. If the price of soybeans is $11 per bushel, that would be sold at $18,315. But if prices are $10 per bushel, its $16,650, a difference of $1,665, not factoring in potential storage costs. A drop in price to $9.50 per bushel would reduce her share to $15,817.50, meanwhile her property taxes and other related costs remain the same. Meanwhile, a locked-in rent price of $180 per acre would guarantee her a return of $18,000.
But, does her farmer want to agree to that if prices continue to fall over five years? The farmer, as usual bears the greatest real risk as he has to buy the seeds and fertilizer and maintain the equipment in advance. To the farmer, falling prices would have to equate to lower property value, irrespective of soil quality and yield. And while lower crop prices mean lower seed costs, they have no impact on other inputs such as fuel prices and equipment.
Across the country, farm ground values have been holding slightly lower in recent years, but the potential for longer-term lowered prices would only worsen that as farm-ground, like commercial property, is judged on its yield. Like all things in farming, the business of leasing ground is risky, and pending discussions concerning foreign trade only heighten that risk, making the American heartland once again a battlefield of business.
Farmers and landowners alike can find this a hot topic with considerable resources and calculators available via their state’s extension offices.
Moving Agriculture Forward
The AGDAILY Digest is the information superhighway for your country road.