February 23, 2015

Weeks after the U.S Department of Agriculture’s (USDA) latest report forecast that U.S. net farm income, which reached a high of $129 billion in 2013, would fall by nearly 33% to $74 billion for 2015, and days before the traditional rental payment due-date of March 1^st, the U.S. is seeing farmers breach rental agreements, and risk legal conflict with landlords as they reduce the amount of land they will farm beginning this spring.

As of 2012, 40% of the farmland in the U.S. Midwest Corn Belt and the Plains was rented. With a drop in farm income in sight, farmers must deal with the cost of inputs remaining high, grain prices remaining low, and the strong U.S. dollar hampering exports. Under these conditions, the total number of rental agreement breaches for the country is not known, however one expert in Iowa predicts that out of 100,000 rental contracts in the state, 1,000 could be breached by spring.

Landowners are, understandably, reluctant to cut rental rates, and grain production is unlikely to be negatively affected in the near term. However, if the weak farm economy continues, it could mean farm consolidation, fewer service industries, fewer elevators, and rippled effects along the value chain.

To avoid legal difficulties, many farmers are turning to operating loans to fund their businesses. In the fourth quarter of 2014, operating loans to U.S. farmers climbed 37% to $54 billion, and loans without a dedicated purpose, which could be used to cover rental payments, doubled year on year in the fourth quarter 2014 to $25 billion, according to survey-based estimates compiled in Kansas City Federal Reserve Bank’s latest Agricultural Finance Databook, indicating how much liquidity has tightened in the past year.

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