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The varying strain of high land rent
It's fairly widely accepted in the Corn Belt that grain prices are going to keep a tighter lid on farm incomes in the next few years compared to the last few years. And that's got experts calling for lower land prices and rental rates.
Yet, that's an outlook. A look forward. How that outlook unfolds and how you -- whether farmer, landowner or both -- are affected depends on a lot, namely how far you're leveraged on big-ticket purchases on your farm. That's exemplified by farmland; how much your crop returns slide, thereby affecting your ability to pay continued high land rents, will go a long way in determining your land solvency. In other words, the more land you rent, the greater your chances of feeling a tighter financial squeeze, says University of Illinois Extension ag economist Gary Schnitkey.
"Commodity prices likely will be lower in the next several years than they have been in the past several years. As a result, per-acre returns will decline, decreasing the ability to pay high cash rents from returns. This situation may require some farms to adjust," he says. "Results from farm financial simulations suggest that these farms will face more difficulty in generating positive farm incomes than farms with lower cash rent percentages and levels. Not all farms that meet these two criteria will face difficulties. Cost levels, off-farm income sources, and debt-to-asset position also impact the ability to absorb lower returns."
If you're in a situation where 90% of your land is rented, you're more likely to face greater financial strain if "the average cash rent on a farm is subtracted from the county average rent for the county in which the farm is located" or farm-minus-county cash rent is greater than $25 an acre. And, that's often a function of farm size.
"There are only 4% of the farms meeting both criteria: a) cash rent more than 90% of their acres and b) have average farm-minus-county-cash-rent over $25 per acre. A higher proportion of these farms are in larger farm sizes: 25% of farms between 4,001 and 5,000 acres meet both criteria, and 28% of farms with over 5,000 acres meet these criteria," Schnitkey says. "Average farm-minus-county cash rents generally increase from smaller to larger farm sizes. Farms with less than 500 acres average -$33 of farm-minus-county cash rent average. Farms with over 5,000 acres have an average farm-minus-county cash rent of $52 per acre."