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Crop budgets may signal lower land rents

Though he admits that "many events will occur between now and the 2014 harvest," one economist is calling for lower crop incomes based on continued strong input costs -- both land and nonland -- and an expected drop in grain prices. That may signal a shift away from a decades-long trend in cash land rental rates.

Gary Schnitkey expects corn prices to average $4.60 per bushel and soybeans to hover around $11 a bushel when he calculates an average return of $275 per acre for high-productivity land in northern Illinois in a corn-soybean rotation. It's based on a set of inputs whose costs are largely unchanged from a year ago, meaning 2014 budgets are all about the market prices gleaned for the grain those inputs will raise.

"Nonland costs in 2014 budgets have not changed much from 2013 costs. Seed and machinery depreciation costs are increased, while all remaining costs are held constant at projected 2013 levels," says Schnitkey, a University of Illinois Extension ag economist. "Fertilizers are the most variable cost category from one year to the next. Fertilizer prices may face downward in 2014. Nitrogen fertilizer manufacturing capacity has been built. Fertilizer prices also exhibit correlation with commodity prices. Hence, commodity prices moving downward may signal downward pressures on fertilizer prices in the near-term."

Projected crop incomes for typically rotated acres in Illinois range from $176 an acre in the southern part of the state to $311 in central Illinois, Schnitkey says.

The numbers come at a critical time, entering the late-summer and early-fall period when farmers and landowners will be restructuring land lease terms for the 2014 crop year. Though there's still room for a lot of fluctuation in prices, especially for fertilizer, it's going to be important for all parties involved to walk to the land lease negotiating table with realistic expectations when it comes time to strike a deal for next year, Schnitkey says.

"There is a possibility of fertilizer costs coming down, but fertilizer costs at $170 an acre moving to $130 or $140 would affect returns, but we would still see lower returns than years before," he says. "Take central Illinois: We're projecting for a corn/soybean rotation, $311 per acre in returns. That's after nonland costs. So, if we add cash rent, we have to have it below $300. There are rents higher than that. We have cash rents that average in the $300 range. That leaves no room for profit."

But applying enough pressure to cash rents to move them lower and, in turn, preventing too sharp a decline in profit potential may be a tough row to hoe, Schnitkey says.

"Coming into cash rent decision time this fall, there should be downward pressure on cash rents. We haven't seen average cash rents come down since the 1980s. It's been a while," he says. "But again, that's where the budgets are leading us."

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