About This Episode
Mike Downey of NextGen Ag Advocates grew up on a family farm in west central Illinois and graduated from the University of Illinois in 2000, when corn was about $1.80 and beans about $5.40 and the home farm was already supporting a couple of families. His first job took him to eastern Iowa with a farm management company. He later co-founded NextGen with Steve Bohr of Farm Financial Strategies and retired farmer Glen Moller to match retiring farmers without successors to young producers.
The leasing program grew out of that matching idea. Downey says the problem with traditional farm management is that no matter how producer-friendly you try to be, you are still viewed as representing the landowner. NextGen positions itself as a third party representing the relationship instead, which turns the annual contentious rent conversation into one about stewardship and the long term. About 90% of their leases are flexible cash rent, which he calls a modern-day alternative wrapping crop share and fixed cash rent into one.
He argues the flex lease is the practical way to reset a rent that has gotten too high. Asking Mr. and Mrs. Landlord for a $50 per acre cut is a hard conversation; offering the same $50 cut alongside a structure that pays them back in a profitable year is a different one. Chris Barron adds that landowners often misread CFAP, government, and crop insurance payments as extra profit when they are only keeping operations whole, which is why showing an actual breakeven changes the room.
“It's one thing to go sit down with Mr. and Mrs. Landlord and ask for a $50 per acre reduction in rent, but it's a different concept, hey, would you consider a $50 reduction, but here's a structure that we can still pay you if we have a profitable year.”
— Mike Downey
Key Takeaways
About 90% of NextGen's leases are flexible cash rent, setting a base near the producer's breakeven and sharing profit with the landowner in good years.
A traditional farm manager is always seen as the landowner's representative; a neutral third party changes what the annual meeting is actually about.
Instead of asking for a $50 per acre rent reduction, offer that reduction paired with a flex structure that pays the landowner back in a profitable year.
Landowners are often shocked when walked through a real breakeven; many set rent from coffee shop rumors and internet or university averages.
Government and crop insurance payments keep operations whole rather than adding profit, and landowners frequently misread them as extra income.
Crop share still has a role, mostly for a retiring farmer spreading income and tax burden across several years.
Full Transcript
Chris: And it all comes down to this.
Mike
Downey: 2 on, 2 out, bottom of the 9th.
Chris: The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag U-Pit, and today we're going to have a little conversation about land rental agreements and leasing. And I've got Mike Downey with NextGen Ag Advocates. And Mike, I really like that last word, the advocates part of it. Sometimes we see some issues with lease agreements and some challenges and things there, so I really like some of the things you're doing. So Mike, go ahead and introduce yourself and tell us a little bit about the company and what you guys are up to.
Mike
Downey: Yeah, appreciate being on, Chris, and a little background about myself. I actually grew up on a family farm down in west central Illinois, and I can still remember very vividly back in 2000 when I was graduating college from the University of Illinois, and price of corn at the time was about $1.80 and price of beans of about $5.40. And so the opportunity to go back to my family farm that was already supporting a couple families wasn't real strong. So my first job actually took me out to Eastern Iowa where I'm still today. My first job was with a farm management company where I worked at for a period of years. But then, oh, it was probably 11, 12 years ago when I first met a gentleman by the name of Steve Bohr, who is the owner of a company called Farm Financial Strategies, which works with families, farm families and landowners on their estate planning and farm transition.
He was actually meeting and working with my folks at the time, and I took a real interest in that area. And kind of fast forward to today. He, myself, and actually a retired farmer from over by the Quad Cities area, Glen Moller is his name, teamed up to found NextGen Ag Advocates, which the premise was helping match up retiring farmers that don't have a successor to young producers to kind of carry on their operation. And but we had to figure out how do we— we got to have more than a matching program. How do we get compensated and have a feasible company. And that's kind of where our leasing program started to be a third party, whether that's a match that we're making or even just other situations where they just want help from a third party, don't necessarily need the traditional farm manager hat, but just need a third party to facilitate that discussion.
So that's kind of— how it's all developed, and we've been doing that for a couple years now.
Chris: Yeah, one of the things I really like about what you guys are doing, and, you know, obviously we work with clients all over the US and Canada as well on things from transition to analyzing cost production and those kind of things. But one of the things I really like about what you guys specialize in is on that leasing program thing you brought up. You know, we see a lot of times some issues with land rental agreements between the farmer and the landowner. And occasionally we see where situations where land management companies maybe are not always advocates for both sides. Maybe there's sometimes even create a bit of a divide. And the thing I really like about what you guys are up to is you actually work with the farmer and and the landowner together and as a third party and really help them create a synergistic relationship as opposed to an adversarial one.
Talk a little bit about what that looks like.
Mike
Downey: Yeah, I would even comment back from my farm management days, as I mentioned earlier, even if I was trying to be very producer-friendly, in that discussion, at the end of the day, you're always viewed as being over on the other side representing the landowner. And that's one thing that Glen, Steve, and I really just didn't want to build another farm management company. We didn't want to compete with them, but wanted to kind of have a different approach that, hey, it's not about who we're representing. It's we're representing everybody, the relationship. And to facilitate a long-term partnership, which is going to benefit everybody in the long run, and especially the farmland.
As you know, the stewardship, care of the land, and if we can set up an arrangement that is viewed more favorably from the tenant to begin with, it really, in our experience, changes the whole feel of that relationship. And we're not so much worried about the annual contentious rent conversations now. We're not worried if we're doing some stewardship practices, what they cost. Now it's more about why we're doing them, more about the big picture.
Chris: Mm-hmm. I like the idea, too, of having the farmer and the landowner considered to be on the same team, as opposed to that adversarial— one has to be on one side and one has to be on the other. To me, this is not a long-term solution no matter who you work with.
Mike
Downey: Yeah, and then you throw in, as you talk a lot on your podcast, the volatility in weather, grain markets, government programs, and now all of the global uncertainty politically. And, you know, it's sometimes hard when we're sitting down at one given time in the year to try to make decisions on a crop that won't be harvested from over a year from now. And to a certain extent, I feel like we're always chasing our tail because, you know, things are happening so fast that all of a sudden we're a year or two behind and it's hard to catch up.
Chris: Right. What— talk a little bit about some of the leasing programs that you guys see that work pretty well. What— give us a couple examples of strategy that seems to work pretty well for you guys.
Mike
Downey: Well, it's no secret in the industry the lease type that dominates is just a typical fixed cash rent. We do still work a little bit with some crop share arrangements. That's been more of a tool for a retiring farmer to kind of manage the income, the tax burdens from retiring over a period of years through a crop share lease.
Chris: Sure.
Mike
Downey: But I would say the The majority, I'd say 90% of our leases are actually a flexible cash rent lease, which we are really— we believe are just a huge tool right now that's being underutilized from producers out there. But it's a— we kind of call it the modern-day alternative. It's kind of wrapping a crop share and a fixed cash rent lease all into one. And we've seen the next generation that's, you know, inheriting land actually really like it if, you know, if we sit down and have a conversation about them and talk about how they work. They really like them. They're not as reliant on the fixed income piece as maybe their parents were.
And but if it's something that's viewed more favorable from the tenant because instead of, you know, expecting to get X that's being paid down the road, which may not be even a factual number because it's influenced by coffee shop rumors or whatever it may be. Instead, we actually sit down and look at the numbers and what is a base level that makes sense at the bare minimum. Could that be a break-even number for the producer? But there's flexibility now that they can share the profits if it's a profitable year with the landowner.
Chris: Well, and that's— and that's Awesome when you can get some of the landowners that actually take that data and that information that's proven on that particular piece of land and can kind of understand the operator and work together with them.
Mike
Downey: That's pretty powerful.
Chris: You did mention the cash rent, you know, and that's kind of what we see too is is that's probably, as a percentage, is by far the largest percentages of the rents that we see with our client base. How do you help them with relations between the landowner and the farmer negotiate that? Do you see more single one-year leases, or do you see more three-year? What do you see there?
Mike
Downey: Yeah, mostly the year-to-year leases, but to help with that conversation, quite frankly. I think what you guys are doing, helping producers understand the numbers and the cost of production, I think that's where we're also trying to be the third party to make sure everybody at the table recognizes what those costs are because, I mean, we are now at commodity price levels that we haven't seen since, I believe, since back in 2009 and 2010. But the production costs, as you know, is totally different. The land costs, machinery, all of those have increased dramatically over the last 10, 11 years. But our commodity prices now are much different. And a lot of landowners, quite frankly, don't understand that. And once we take them through an exercise and show them what a breakeven might be In a lot of cases, they're like shocked and it's like the wow moment. We had no idea.
Chris: We just—
Mike
Downey: when we checked on the internet and university sources or, you know, whatever you might find, sometimes they just don't know any better and they hear something being paid and they just think that's the fact. That's what the rent should be.
Chris: Well, and to your point, we've ran into the same thing with a few clients too when the landowner actually gets an opportunity to see that the margin, how tight it is, and then a lot of times I think there's a misperception and we're running into that right now where, you know, between COVID payments, CFAP payments, government payments, and crop insurance, I think sometimes there's the perception from the landowner side of things that, well, gee, they're getting all that money when in fact, yeah, they're getting that money, but it's basically keeping them whole. It's not additional profit. And so, you know, I think that transparency is very important for them to understand that, you know, that's just basically keeping them whole. It's not additional income. It's not added profitability.
And when the market prices are where they're at now, it's very easy to increase either a cash rent or even a flex lease, but it's a lot more difficult to go the other way, you know. And so consequently, what we've seen— and I'll have you speak to this— but, you know, we've seen farmers even say, well, you know, I've got this one farm where the rent's too high. I'm going to farm it one more year at that level, and then I'm going to try to explain to them what I need to do. And we're on about year 4 of them trying to explain to the landowner why the rent is too high on a given parcel of land. There's just very minimal, if any, margin there. And I have a partner that always said, you know, we don't need to do more just to do more. We definitely don't need the practice.
Mike
Downey: And so— Yeah, we're definitely seeing— I think to a certain extent, we've been trying to kick the can down the road for better times and not— and delay that conversation on the rent with, with certain landlords. But based on the calls that we're getting here over the last 30 days, I think a lot of people, or even their financial team, the lenders, are— there's a lot more conversations are going to be had and That's where I think this flex lease concept is a tool, quite frankly. You know, it's one thing to go sit down with Mr. and Mrs. Landlord and ask for a $50 per acre reduction in rent, but it's a different concept, hey, would you consider a $50 reduction, but here's a structure that we can still pay you if we have a profitable year. Otherwise, again, we're always playing this game that we're a year behind.
If we don't, if we don't have a good year this year, the rent isn't impacted till next year. We have a really profitable year next year, the landlord wants more rent, but the year following that, that year, there's no guarantee that it'll be a good year. So it's always this chasing the tail. So just trying to set up a structure that's more flexible. And, you know, we've seen once people get a year under their belt, they actually, they love it.
Chris: Well, they can, they can see the transparency of what's really going on on the farm too, and, and again, that information a lot of times isn't known until you get well into the year. It's kind of like, for example, 2019, I would imagine on your flex leases, you know, with CFAP payment and a few other things, and maybe not all of the grain being marketed yet for the quote-unquote the 2019 year as an example, Sometimes that flex lease isn't complete then probably until you get well into the next growing season. Is that right?
Mike
Downey: Yeah, that'd be, you know, kind of a podcast in itself. Just, you know, one of the other reasons I think people shy away from those is there's just so many different ways to set them up, right? But, you know, we found once you set up— set it up, it really changes the conversation now. Less about what the rent should be year to year, but more about the other things that are important for landowners. You know, if that's the fertility or stewardship of the, of the land, whatever it may be. Now we can focus on those areas that we think longer term are more important anyway. Right, right.
Chris: So what are you seeing for, for on the cash side of rents? I know there's people that are going to be thinking this, you while they're listening to us talk, what are rents doing? You know, what are you seeing? Are they flat? Are they going up? Are they going down? What are they doing from what you've seen?
Mike
Downey: Yeah, the challenge is, is, you know, historically land rents tend to follow land values. And as you know, we— the farmland market, we just haven't seen a big adjustment in values with the farm economy over the last 4 or 5 years. We see more and more non-farming groups interested in buying land— investors, institutional funds— that are impacting and stabilizing the farmland market, which is, and hence, you know, stabilize the cash rental values as well. And so yeah, I think, you know, still seeing it being stable, but like I said earlier, I think we We're seeing definitely an increase from producers reaching out and saying, hey, I think we're ready to have a difficult conversation. Could we— do you have any ideas to help us? Or sometimes it's awkward as the tenant to have that conversation with a landlord.
But having a third party out there that, hey, they're doing something a little different, would you take the time to sit down and learn? And there might be benefits for you. For all of us in this. And so, so there's definitely a lot more conversations, Chris, whether those yield adjustments and rent downward, that's yet to be seen. But I think there's a lot— the mindset is there more so than we've seen the last couple years.
Chris: Yeah, I think there's more motivation from the, from the producer side to have those conversations, at least from what we're seeing with our client base, more than ever. Just because of where commodity prices are currently, not to mention where they've been in the past, but especially this year. It's just really, really tight and things, things are, are increasing the motivation for producers to have that conversation. So with that said, is there any, any questions I haven't asked you? And then I'd like you to go ahead. I know you guys are going to be having a webinar coming up and I want to have you kind of tell people how they can get a hold of you or how they could watch that webinar if anybody's interested in and kind of seeing what you guys are up to and talking about there.
Mike
Downey: Yeah, we often get asked from different groups to come in and speak on farm transition, whether that's estate planning, farm transition, whether that's in your family or, you know, again, we're doing more planning with families outside the family with non-related successors. And then the land rents is another one that we get asked to speak on with With COVID that's changed our approach on that. We prefer getting in front of people face-to-face, but we're going to try more of a, I guess, through the Zoom platform, different segments on estate planning, farm transition. We're having our one on land rents next Monday, August 3rd, and that'll be, you know, 45 to 50 minutes with some questions and some real valuable information. So yeah, if anybody's still interested, I still think we have some room if folks want to sign up for those.
Chris: Where do they go to sign up for that? Just the NextGen Ag Advocates website?
Mike
Downey: Yeah, we have a flyer with additional details right on our homepage. Our website is nextgenag.us, and there'll be information on there to either call in or email their information that we can get a link out to them ahead of time.
Chris: Awesome. Well, that sounds good. That's one of the questions we get a lot from our clients, and I think, you know, the whole goal is for all of us that work with producers, help producers, is that we kind of work together to have kind of the same mission, is just to make sure that we're out here and doing what we can for the farm community. Being a producer myself, we will take all the help we can get to try to figure out how to, how to be profitable in these, some of these trying times with COVID and some of these other things going on in the economic environment. But Mike, NextGen Ag Advocates, we really appreciate your time today and thanks for the conversation.
Mike
Downey: Likewise, thank you very much, appreciate the opportunity.
Chris: You bet, and thanks everybody for listening. If you've got questions on this, want to get a hold of us, we can get, get you connected with these guys and tie in on some ideas for some land rental agreements that might work well for your operation. So again, thanks everybody for joining us on this episode of the Ag View Pitch. Catch you next time.