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Cash land rent ups red ink risk

Jeff Caldwell 11/28/2011 @ 9:17am Multimedia Editor for Agriculture.com and Successful Farming magazine.

Farm income projections for next year are still on the profitable side. Grain prices have slid since summer, but expected $5.40/bushel and $11.70/bushel prices for corn and soybeans, respectively, still mean "good financial incomes" for most farmers. That may not be the case if you're paying a higher cash rent for any of your acres, one expert says.

"Price reductions to long-run averages result in lower incomes, particularly for farms with high percentages of cash rent," says University of Illinois ag economist Gary Schnitkey. "At high cash rents, farms with 100% of their farm cash rented would have negative incomes. Lower prices would result in further reductions in net incomes."

Using a hypothetical 1,200-acre farm with an expected corn yield of 187 bushels/acre and soybean yield of 54 bushels/acre on which 2/3 of the acres are in corn, Schnitkey lays out 4 potential price scenarios. In the first, he uses expected corn and soybean market prices and follows with 3 subsequently lower price projections:

  • Scenario 1: $5.40/bushel corn; $11.70/bushel soybeans
  • Scenario 2: $4.50/bushel corn; $10.50/bushel soybeans
  • Scenario 3: $3.50/bushel corn; $8.20/bushel soybeans
  • Scenario 4: $3.00/bushel corn; $7.00/bushel soybeans.

For all scenarios, Schnitkey factors in non-land costs of $546/acre for corn and $306/acre for soybeans and adds $480,000 in debt.

Now, add in cash rent. Schnitkey uses $275/acre and $350/acre. "For the 'typical' farm, the 2012 projected prices of $5.40 per bushel for corn and $11.70 per bushel for soybeans results in $222,100 of net farm income," Schnitkey says. "A 100% cash rent farm with a $275 per acre cash rent has projected net farm income of $200,500. Raising cash rent to $350 per acre reduces net farm income to $110,500."

Knock those grain prices down to $4.50 for corn and $10.50 for beans, the "long-run" prices Schnitkey says are likely over the next 5 years. "At long-run prices, the typical farm has $86,500 net farm income. The cash rent farms have significantly lower incomes of $40,900 for the 100% cash rent farm with $275 per bushel cash rent and -$49,100 for a $350 per bushel cash rent," Schnitkey says. "For the typical farm, net income fall $35,600 from the projected 2012 prices to the long-run prices. For the same price change, net income fell $159,600 for the cash rent farms."

Now knock those crop prices down to $3.00 to $3.50 for corn and $7.00 to $8.20 for soybeans. That's when the red ink really starts to flow for 100% cash rent farms.

"For low prices and poor prices, net incomes are $34,100 to $33,700 for the typical farm, -$20,700 to -$21,100 for the 100% cash rent farm with $275 per acre cash rent, and -$110,700 to -$111,100 for the 100% cash rent farm with $350 per acre cash rent," Schnitkey says. "Net incomes do not vary much between the low and poor price scenarios because crop insurance payments are offsetting crop revenue declines as commodity prices decline."

Schnitkey recommends restructuring cash rent terms if that's an option and if you haven't already forward-contracted grain under higher prices. "When lower commodity prices occur, farms with high amounts of cash rents will face difficult decisions. Attempts may be made to lower cash rents so large financial losses do not occur," he says. "Alternatively, these farms will have to absorb financial losses under the hope that commodity prices turn upward quickly so that the farm moves into a positive income situation."

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