By Greg Vincent
The correlation of cash rent increases and record-high grain prices in 2008 are well documented. Now that grain prices are back to more modest levels, cash rents show signs of stabilizing, but they certainly aren't retreating as quickly. That could leave some farmers looking for protection against rising rents and/or falling grain prices and that need is growing daily.
For a producer with a 185 bu. average corn yield, a one penny move in cost management can mean a $1.00 bu. in today's market, says Bob Utterback, president of Utterback Marketing and Farm Journal economist. If the corn market moves higher, those recently-stabilized cash rents could rocket higher yet again. His strategy: put a long corn hedge in place.
"Cash rent is one of those variables when it goes up, it doesn't come back down. When corn's at $3.00 it should stabilize, but I don't think it will come down. But when corn goes from $3.00/bu. to $5.00/bu. cash rents will explode.
"Think almost like a livestock producer: when I can buy corn at $3.00 or lower, as a feed buyer I know I should be locking corn. I would say the same thing to a farmer knowing that within time you're going to have to reduce acres and stimulate usage will eventually drive corn prices higher.”
This is where he says his strategy of hedging costs against the market could pay significant dividends. The amount of your production should be in relation to your expected move in input costs or cash rents.
Utterback uses fertilizer as an example: "$3.00/bu. corn is to $400/ton fertilizer as $5.00/bu. corn is to $1,000 ton fertilizer. So if you have 100 tons of fertilizer, you should be long about six corn contracts. It's a relationship what each farmer has to calculate, but you don't want to over do it.”
As recently as December Utterback says many farms were showing as much as $200/acre return on investment, which is the 4th highest return shown in the past 40 years. While the price received on a per bushel basis may not have been as good, farmers need to keep in mind that the selling price is not what matters.