The 2012 drought is the worst drought in more than half a century. However, the short- and long-term economic effects on farmers and landowners remains unclear. While record setting prices for corn and soybeans and crop insurance may offset lower yields for many farmers, the drought will still hit others hard, particularly livestock producers.
The immediate impact on landowners will likely depend on the characteristics of their tenant’s operation, the provisions of the lease arrangement, and the crop insurance carried by the tenant. A tenant hit particularly hard by the drought may have difficulty paying any remaining balance on this year’s rent or possibly paying next year’s in advance. However, the drought’s longer term impact on rent remains to be seen and many landowners and farmers are taking a wait and see approach before negotiating new rental arrangements.
There are steps landowners can take to better understand their tenant’s situation, to make informed decisions about lease enforcement and rental rate adjustments, and to help mitigate harm from recurring droughts.
Communication and Transparency
One of the most effective ways of ensuring a just and equitable rental arrangement is through communication and transparency. Information is critical in making any decision, and the more you know about your tenant’s operation the more you can adapt the lease arrangement to meet both of your needs. Critical information for negotiations after a drought include the expected insurance payment or at least the type and amount of insurance carried, the farm’s yield, and the actual price received. Again, while a drought can be a devastating event, and landowners can play a crucial role in helping to mitigate the harm from such events, its important for landowners to have as much information as possible before negotiating a lower rent.
Farmers are not under any obligation to share this information with a landowner, though, if revenue did decrease, it certainly may be in the farmers best interest to keep the landowner informed about the situation. Landowners can also require communication and transparency in the lease agreement. Lease provisions can require tenants to carry a certain amount of insurance or to disclose the insurance carried. Lease provisions can also require reports on yield and the productivity of the soil.
As mentioned before, the effect of the drought on rental rates remains to be seen and may be insignificant as one year’s drought is not an indication of the next year’s harvest. The method in which rental rates are determined can have a significant impact on a tenant’s financial situation and, therefore, their ability to withstand a drought and fulfill their contractual obligations.
Flexible or adjustable cash rents are an increasingly popular method for determining rent. Such arrangements use yield, price, or both to determine the amount of rent to be paid. Using such a method can help mitigate the risk of low yields from drought. You can read more about how flexible lease arrangements can be used to share risk in Chapter Five of this website.
It is important to recognize that the formula used to determine the adjustment can actually increase a farmer’s risk in some situations. For instance, if the formula only takes one factor, either yield or price, into account, the farmer could end up paying more even though their overall revenue decreases. For instance, in a drought, yield will likely decrease and, as we have recently seen, prices will increases. If the flexible rent is based only on price, the rent will increase, even thought the farmer may see less revenue due to a substantial decrease in yield.
Drought Assistance Programs
There are also drought assistance programs available to help offset losses from the 2012 drought. USDA has a web page dedicated to providing more information about these resources.
Drake Agricultural Law Clinic Drought Forum
Additional information may also be obtained from an upcoming forum on the 2012 drought. Hosted by Drake University’s Agricultural Law Center and the Iowa Bar Association’s Agricultural Law Committee, the forum will focus on the legal and financial tools available to provide assistance to farmers suffering from the drought.
The event will take place September 20, 2012, 12:30 p.m. to 5:00 p.m., at the Neal and Bea Smith Legal Clinic. Registration is required but the event is free.