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Thursday, November 24, 2011

High Cash Rents Can Spell Trouble If Crop Prices Continue To Fade


The unsettled global economy has pushed grain prices down with other commodities, giving a good indication of what farmers might expect in farm income should they have substantial acreage with high cash rents.  It presents a “stress test” of sorts for a farming operation.  Many operators engaged in cash rent negotiations with land owners may want to use the concept to determine their comfort level with various levels of cash rent, should corn and soybean prices drop below their current USDA projected average of $6.70 and $12.60.

Farms with higher levels of cash rent, and higher percentages of acreage under cash rent are particularly susceptible to financial stress resulting from crop prices that are softer than expected when leases were signed.  That is the finding of University of Illinois Farm Management Specialist Gary Schnitkey who calculated a variety of projected prices and cash rent scenarios.  In some of the better scenarios income was cut in half when stretching from 10% cash rented land to 100%.  And using typical input costs with moderate levels of cash rent, operators could lose substantial amounts of money if corn drops into the $3 range and soybeans drop to $7.

Schnitkey created a hypothetical farm with 1,200 acres, of which two-thirds is 187 bushel corn and one-third is 54 bushel soybeans.  The costs for crop inputs, machinery, and other overhead are $546 for corn and $306 for soybeans.  Those represent everything except for cash rent.  If your non-land costs are close to those, proceed to the next step and add in your cash rent.  Schnitkey happened to use cash rent examples of $275 and $350, which are neither extraordinarily high nor low.

An insulating factor occurs when a farm has a blend of land that is owned, crop shared, and cash rented.  Schnitkey’s input costs and market prices, even low prices, will maintain profitability on a farm that has a diversity of owned and leased cropland.

The stress test will be applied by commodity prices.  Looking at new crop market prices which determine crop insurance revenue guarantees, the projected prices are $5.40 for corn and $11.70 for soybeans.  At that revenue level the $275 cash rent allows a net farm income about $200,000.  However, that is cut in half with a $350 cash rent.  If corn prices fall to $3.50 per bushel and soybeans fall to a level just above $8, then profitability is eliminated regardless of the level of cash rent.

Using a long term average price of $4.50 for corn and $10.50 for soybeans lowers net farm income to $40,000 where a $275 rent is paid and a $49,000 loss where a $350 rent is paid.  Lower price result in lower net farm income and that situation is made worse when high cash rents are paid.  When crop insurance is used, the level of prices does not impact net farm income that much, but the cash rent has to be deducted from the indemnity payment, and net farm income drops substantially at that point.  Schnitkey says when high cash rent is paid and low commodity prices occur, the operator faces difficult decisions.

Periods of low market prices can be a challenge for many farming operations, but it is particularly difficult for those with higher levels of cash rent, when rent is paid on a majority of the acreage farmed.  Rents do not have to be extraordinarily high to cause net farm income to wither.  To some degree market prices can be indemnified with crop insurance, but high cash rent cannot.


Posted by Stu Ellis on 11/24 at 06:45 PM | Permalink

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