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How Much Should Your Cash Land Rent Go Down?

A huge factor in the picture of crop profit potential in the coming year or so -- one that's not looking too bright right now -- is land costs, be it for ownership or leasing. For the latter, prices will have to fall in the next year if grain farmers in much of the heart of the Corn Belt are going to make money next year, new analysis shows.

The good news is there's hope for land costs to stay under overall operator and land returns . . . with a big "if." Grain prices have a lot of room to go before the breakeven point rolls around, according to new data from University of Illinois Extension ag economist Gary Schnitkey.

"At a $3.75 corn price and a $9.50 soybean price, the operator and land return for the Central-High region is $226 per acre. The average cash rent in 2014 is $293 per acre, implying a farmer loss of $67 per acre ($226 operator and land return - $293 cash rent)," he says of just one of the four regions of Illinois he examined in his recent analysis. "Other regions have similar levels of loss: -$77 per acre for the North region ($188 operator and land return - $265 cash rent), -$73 in the Central-Low region ($170 operator and land return -$243 cash rent), and -$71 in the South region ($92 operator and land return -$163 cash rent). Note that $20 to $25 per acre decreases in 2015 cash rents do not lead to positive farmer returns given that cash rents started at average levels."

Based on his data, Schnitkey says the magic number for a corn price that will push the scenario out of the red and into the black is $4.50 a bushel. For soybeans, that number is $11.00 per bushel. At these prices, the average per-acre return would range between $142 and $298 an acre, just $5 above the average cash land rent on the high side and $21 below the average on the low end (between $163 and $293 an acre on average for 2014). The slide is quick when you take even a quarter off the average corn price; at $4.25 per bushel, per-acre returns go down to $275, almost $20 below the breakeven point. As prices stand right now, you could forward-contract all the way to May 2017 and come close, but not quite hit that critical price point.

"Expected 2016 commodity prices during the fall of 2015 will have a bearing on pressures placed on cash rents. If corn and soybean prices respectively remain near $3.75 and $9.50 per bushel, cash rents will need to decrease by around $70 per acre from 2014 average levels before farmer returns are near zero. Obviously, larger decreases would be needed before farmer returns become positive. Pressures will be reduced with higher price expectations," Schnitkey says. "Take the price scenario having respective corn and soybeans prices of $4.25 and $10.50 per bushel. Under this scenario, rents would have to be decreased by $19 to $37 per acre, depending on region, from 2014 average levels to have farmer returns at $0 per acre. For farmers to have positive expected returns without cash rent of nonland costs, corn and soybean prices respectively need to be in the high-$4.00 and mid-$11.00 range.

"Given current price levels, average cash rent levels need to decrease by over $70 per acre for farmers to have returns near zero. Continued pressures on cash rents will occur in 2016 unless significant increases in prices occur from their current levels. Unless nonland costs decrease, prices must be in the high-$4.00 range before downward pressures are not placed on average cash rents," he adds.

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