Power Hour: Declining Prices Will Pressure Cash Rents

October 26, 2012 09:31 AM
 
Cash Rents

Possibly not in 2013, but in not the too distant future, declining corn and soybean prices are likely to pressure high cash rents lower.

 

Here’s why: the average cash rent for several counties in central Illinois is close to $325/acre, with a number of deals above that, for highly productive land that yields 194 bushel corn.

Using conservative 2013 prices of $5.50 corn and $12.50 soybeans using present futures prices, returns are $510/acre at $325 cash rent, leaving the farmer $185, says Gary Schnitkey, University of Illinois ag economist. "Even cash rents in the $400 range are estimated to provide positive returns to farmers," Schnitkey adds.

Power Hour webHowever, over the next five to 10 years, the average corn price projected is $4.50, and $10.50 for soybeans, generating $341/acre, or a $16 return to the farmer paying $325 cash rent. "The $16 will not cover enough return for the farmer to cover implicit costs of unpaid labor and equity capital," Schnitkey says. "If prices remain at these levels for several years, cash rent levels likely would face downward pressures."

At low crop prices of $3.50 corn and $8.50 soybeans, the return is $172/acre or a $153/acre loss with a cash rent of $325. "Sometime in the near future commodity prices likely will reach those levels, perhaps staying at them for several years. These prices have happened relatively recently, with corn prices averaging close to $3.50 in 2009," Schnitkey notes.

He adds that one of the results of rising cash rents and a volatile price environment is that farmers are taking on more risk. "The question will be how many years it will take for cash rents to decline once a low price environment occurs. While landowners may wish to mute return changes over time, achieving that aim is not entirely possible given the variable price environment," Schnitkey says.

 

 

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