Tuesday, July 16, 2013
Will Your Expected Crop Revenue Cover Your Cash Rent? How about 2014?Tweet
How many times do you practice that speech to your spouse when you have to confess something or open a potentially sore subject? Your speech practicing expertise will need to be honed well this fall when you call on your elderly landlord and try to explain why you cannot pay as much cash rent next year to farm their land. Yes, you will have to explain why land prices are at record high levels, but that has nothing to do with the fact the corn prices are in the $4 range and soybeans are in the $10 range and you are not making enough income to pay the cash rent they want. This will not be a pretty conversation and you may lose the land, but which is worse, losing the acreage or taking a financial bloodbath with high cash rents and losing your entire operation?
The way grain prices are shaping up for this season, there will not be enough revenue per acre to be able to pay the cash rents that are said to be common across a lot of farmland. And that will be the case for the 2014 crop based on current production expense estimates. Something will have to give, and cash rental rates will have to be rolled back says University of Illinois ag economist Gary Schnitkey. He bases his prediction on $4.80 corn and $10.75 soybeans which are the midpoints for the price range for those crops projected by USDA. Using those prices, and multiplying them by potentially good yields for farmland with varying productive capability, Schnitkey says there will be some cases that revenues will not cover the current non-land expenses and the cash rents reported for 2013.
In his example for highly productive farmland, a 195 bushel yield is used with the $4.80 corn price to give a $936 gross revenue. Subtracting $563 for non-land production expenses leaves $373 per acre to cover the cash rent with any remaining used as a return to management and labor (profit.) Since that assumes all of your acreage is in corn, lower revenue has to be included for any soybean acreage. Schnitkey estimates a 56 bushel yield for soybeans on one-third of the total acreage, and using the $10.75 price for beans, there is $602 in gross revenue. Subtracting $350 for non-land cost for soybeans results in a crop mix on all of the acreage that provides $333 per acre for land and operator. If your cash rent is more than $333 per acre, then those yields and prices will not be high enough to cover the cash rent and still provide for family living expense.
While lesser productive farmland will generate lower yields, it is expected that it is demanding a lower level of cash rent. The process is the same to determine how much of a financial pinch there will be when calculating if the return to land and labor can pay both. If you have penciled out a hard pinch for the current year, Schnitkey says a slight increase in commodity prices may provide some breathing room, “Price realizations greatly influence operator and land returns. Take a $.40 increase in corn price from $4.80 to $5.20 and an $.80 per bushel increase in soybean price from $10.75 to $11.55. This results in a $67 per acre increase in operator and land return from $333 per acre to $400 per acre. As price expectations change, returns will change as well. This then leads to a need to re-evaluate cash rents.”
That is the analysis for the 2013 crop. While no estimates have been made for the 2014 crop in terms of seed, fertilizer, and other non-land costs, there is an expectation that crop prices for the 2014 crop will be less than what is projected for the 2013 crop. That makes it incumbent upon an operator to seek cash rents for next year that have not been as high as in recent years.
Current prospects for commodity prices may be considerably lower than when many operators signed cash rent agreements last fall. And those prices may drift even further down in the coming year when cash rents have to be negotiated for the 2014 crop. Operators will not be able to fund higher level cash rents with prices expected for this fall and in 2014, necessitating an adjustment downward in cash rents.
Posted by Stu Ellis on 07/16 at 10:49 PM | Permalink
Posted by: Harold Smith at July 17, 2013 7:07PM