Can You Break Even on Cash Rent in 2015?
What should you be paying for cash rent this year? Crop revenues will be well off the last few years' screaming pace, but what exactly should that mean to what you pay for your land?
Corn Belt cash rent typically makes up a percentage of total crop revenue ranging from 20% to 35% in most years, according to data compiled by Illinois Farm Business Farm Management (IFBFM). But the keyword here is range: It's far from a lockstep relationship between the two variables, according to University of Illinois Extension ag economist Gary Schnitkey.
"Cash rents as percentages of corn revenues averaged higher in the early 2000s than later in the period. Take northern Illinois as an example: Cash rent as a percent of corn revenue averaged 37% for the years from 2000 to 2005. From 2006 to 2013, cash rent as a percent of gross revenue averaged 23%," he says. "Higher commodity prices were higher from 2006 through 2013, leading to higher crop revenues. Cash rents did not increase as fast as the gross revenue increases, leading to lower cash rents as percentages of crop revenues. Cash rents have been increasing in 2012, 2013, and likely will increase in 2014, leading to increases in cash rents as percentages of corn revenues."
In general, history shows cash rent percentages for soybean ground are typically higher in relation to crop revenue when the latter value is lower. In northern Illinois for example, Schnitkey says, "crop revenues as percentages of soybean crop revenues averaged 51% from 2000 to 2005 and 32% to 2006 to 2013."
So what should you expect for the coming year? Schnitkey uses a range in yields from 165 to 199 bushels per acre (the expected yield range in his state of Illinois) and a $4.00-per-bushel corn price. At these levels, total crop revenue would comprise a range from $660 to about $800 an acre. At the low end -- a 165-bushel corn yield and $660-per-acre crop revenue -- cash rent should comprise 24% of total revenue, or $160 an acre, based on historical trends. The bad news is, in that scenario, the breakeven cash rent is $80 an acre, Schnitkey says. At the high end -- 199-per-bushel corn and $796-per-acre crop revenue -- cash rent would be $262 an acre, just over $80 higher than the breakeven rent level.
"For this example, cash rent as a percent of corn revenue is 34%, roughly the same percentage as for the 2000-2005 period. If no decreases in cash rents occur, cash rent percentages are back to the previous level before the commodity price increases occurring in the mid-2000s," Schnitkey says. "These levels, however, result in negative farmer returns, largely because of nonland cost increases that have occurred since 2000. Hence, using percentage averages from 2000-2005 may not be appropriate for setting cash rents in 2015."
Chart courtesy Gary Schnitkey, University of Illinois Extension.
Obviously, grain prices and yields are critical to bridging the gap between expected cash rent levels and the point at which they cash flow for the renting farmer. The former is more important this year, though, as any upturn in the latter could only go further to depress prices, deepening the rift.
"Obviously, corn yields and corn prices for 2014 are not known. A higher corn yield would increase revenue. In northern Illinois, a corn yield above 214 bushels per acre would give a positive farmer return. However, a yield of this level likely would result in large supplies leading to lower corn prices, as is occurring this year," Schnitkey says. "Cash rents as percentages of crop revenues are projected to increase in 2015 to near average levels for 2000-2005. These levels will result in farmer losses due to higher nonland costs from early-2000s levels. The negative returns point to the need for adjustment downward in costs, including cash rents. The size of negative projected returns also suggests that decreases from average cash rents are needed given current projections of 2015 revenues and costs."