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What it takes to send cash land rents lower
When will cash land rental rates hit their tipping point and follow a plateauing and dipping land market lower? For that answer, you might not have to look any further than the mirror.
How long farmers are willing to keep paying high land rents will likely determine when that market starts to mimic slipping land values in general, according to a report released this week by University of Illinois Extension ag economist Gary Schnitkey. That tipping point may come sooner rather than later, considering current projections for lower farm incomes in the coming year.
"Farmers with average cash rents are projected to have marginal returns in 2014. Losses around the $60-per-acre range are projected to occur with 'high' cash rents," Schnitkey says. "How quickly these 'high' cash rents come down likely depends on the willingness of farmers to take losses on 'high' cash-rent farmland."
Obviously, the more land you rent in that "high" price category, the more susceptible you are to financial losses in a year when grain prices are expected to continue to mark time in lower territory from the highs of the last few years. Just because you have some high land rental rates doesn't mean things are dire just yet, however: Evaluating the amount of your total land base that is costing you most and seeing how the rest of your acres can make up for those losses can go a long way toward ensuring you won't bite the bullet completely, Schnitkey says.
"A farmer's willingness to sustain losses likely depends on a farm's land tenure and ownership positions. Those farms most vulnerable to suffering large losses on a total farm basis have a large percentage of the acres cash rented (90% or higher) at high-average cash-rent levels," he says. "Many farms have a small proportion of their acres with high cash rents. These farms will be able to have overall positive financial results while still taking losses on farmland with 'high' cash rents. In essence, other farmland will be used to subsidize the 'high' cash-rent farmland. It would be prudent for farmers to evaluate financial returns with and without 'high' cash rent acres as part of their operations. Financial results may be improved if 'high' cash rent are not farmed and the farm contracts in size."
In the end, it will likely require a shift in the amount of land farmers are willing to rent at currently high levels to drive down the market in general. Today's projections for 2014 crop income -- and the many elements tied to those final numbers -- will have a lot to do with whether or not that downshift reaches fruition.
"Obviously, actual realization of 2014 yields, prices, and costs will cause results to vary," Schnitkey says. "In most cases, farmer returns at average cash-rent levels will be marginal. 'High' cash rents will result in negative returns. How quickly these "high" cash rents come down likely depends on the willingness of farmers to take losses on 'high' cash-rent farmland."