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Returns & land rents given lower grain prices
The U.S. Department of Agriculture recently updated its World Agricultural Supply and Demand Estimates (WASDE), with the midpoints of 2013/2014 price estimates at $4.80 per bushel for corn and $10.75 per bushel for soybeans. These prices are significantly below prices in recent years, suggesting that agricultural returns may be lower in 2013 and 2014. These lower returns then may lead to the need to reevaluate cash rents. Herein, returns at a $4.80 corn price and a $10.75 soybean price are examined by calculating operator and farmland returns for three different farmland productivities. These returns are then compared to current cash rent levels.
Operator and Farmland Returns
Operator and farmland returns - equaling gross revenue minus nonland costs - represent the amount of return that can be split between a landowner and a farmer. Take an operator and land return of $350 per acre and a cash rent of $300 per acre. In this case, the farmer receives $50 per acre ($350 operator and land return - $300 cash rent). When cash rents exceed operator and land returns, the farmer faces losses.
Operator and land returns are calculated for three different farmland productivities: High, low, and lower. High and low productivities are based on yields and costs from central Illinois farms summarized by Illinois Farm Business Farm Management (FBFM). Lower productivity has corn and soybean yields below central Illinois averages summarized by FBFM.
For high productivity farmland, corn yield is expected to be 195 bushels per acre, resulting in $936 gross revenue given a $4.80 corn price. Subtracting $563 of nonland costs gives an operator and land return for corn of $373 per acre. Soybeans are expected to yield 56 bushels per acre, resulting in $602 of gross revenue at a $10.75 soybean price. Subtracting $350 of nonland costs from $602 gross revenue gives $252 of operator and land return for soybeans. Herein, two-thirds of the acres are assumed to be planted to corn and one-third to soybeans. This crop mix gives $333 of operator and land return per acre.
Operator and land returns are lower for the remaining two land productivity classes. Low-productivity farmland has a 183-bushel-per-acre corn yield and 53-bushels-per-acre soybean yield. Operator and land return for low-productivity farmland is $291 per acre. Lower productivity farmland has 160-bushels-per-acre corn yield, a 50-bushel-per-acre soybean yield, and a $211-per-acre cash rent.
Comparison to Recent Average Cash Rents
On April 9, a farmdocdaily post released estimates of 2013 cash rents on professionally managed farmland based on a survey conducted by the Illinois Society of Professional Farm Managers and Rural Appraisers (available here). The midpoint cash rent is $396 per acre for excellent qualify farmland with corn yield over 190 bushels. The $396 per acre cash rent is above the $333 operator and land return calculated above for high-productivity farmland with a 195-bushels-per-acre expected corn yield.
The Illinois Society reports a 2013 midpoint cash rent of $339 per acre for farmland with corn yields between 170 and 190 bushels per acre. Low-productivity farmland with a 183-bushel-per-acre yield has an operator and land return of $291 per acre. Similar to high-productivity farmland, the current cash rent of $339 per acre is above the $291-per-acre operator and farmland return.
The Illinois Society reported a 2013 midpoint cash rent of $285 per acre for farmland with expected yield between 150 and 170 bushels per acre. In the calculations above, lower productivity farmland with a 160-bushel-per-acre corn yield has $211 per acre of operator and land return. Similar to the higher productivity class, the $285 per acre cash rent exceeds the $211 operator and land return.
Professional farm managers tend to have above-average cash rents. The USDA reports average cash rents by county (see this farmdocdaily article for a map here). A number of these average cash rents are near the above calculated operator and land returns, particularly in central Illinois. For example, average cash rent is $324 per acre in Sangamon County, $326 in Macon County, and $313 in Logan County. These averages are only slightly below the $333 per acre operator and land return for high-productivity farmland. Given that there is a wide range of rents summarized in an average county cash rent, there likely are a large number of cash rents above the operator and land returns.
Operator and Land Returns for Differing Prices
Price realizations greatly influence operator and land returns, as illustrated in Table 2. Take a 40-cent increase in corn price from $4.80 to $5.20 and an 80-cent 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 reevaluate cash rents.
Price in the high $4.00 range for corn and high $10 range for soybeans are being projected for next year. Much more will be known about price levels once clearer expectations of 2013 corn and soybean yields are reached. If prices are in the high $4.00 range for corn and $10 range for soybeans, returns will be lower than in recent years. As a result, cash rent levels may need to be reevaluated, particularly for situations in which the current cash rent is above average.