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Farm Rents and the Drought: Now What?

July 17, 2012
farmland fields house
  
 
 

SOURCE: US Farm Lease

How can landowners protect themselves during adverse weather years?
 

A question we are now getting frequently is, "How is the drought and excessive heat going to affect my cash rent?" This is being asked by both landowners and tenants. The best answer is, "It is too early to tell." Just this morning I was asked, "Are the farmers going to survive?" In many parts of the Midwest, the answer to these questions will depend on financial stability, marketing talents (or luck), good soil tilth, and crop insurance.

Row crop agriculture, in general, has had good years for a while, enabling many operators to build up equity and reserves, which will help carry them through leaner times. Some who took this opportunity to expand in various areas, such as equipment, may be second guessing themselves, but may still be fine financially depending on how they handled financial and production risk. If they rented land that was adequately protected by crop insurance or if they had adequate financial reserves, then, they should come through the year in ok shape. If the producer chose lesser amounts of crop insurance coverage or spent extra cash reserves, then, the picture becomes less clear.

Marketing is always a key to profitability. Studies show that producers are better off in most years by marketing their grain early. The main problem to this strategy is when there is adverse weather. A big concern during years of adverse weather is when farmers are prudent and forward sell more bushels than what they grow. With this year's adverse weather, the producer now may not grow enough grain to cover their marketing contracts.

This strategy can easily be protected by Federal Crop Insurance. If the producer does not adequately insure and has substantial yield loss, the producer will have to buy corn that is more expensive to fill their contract obligations. Marketing procrastinators who chose not to market early will be ok in this regard, if they grew adequate bushels or have adequate crop insurance. However, procrastination is not a habit of producers who are good financial managers.

So what can landowners do to protect themselves during adverse weather years, such as this year? The first line of defense is to select a great tenant who is conscientious about keeping the farm soils in good condition. Good soil condition (tilth) farms are most ready for drought years. They have good soil structure for increased water holding capacity and natural fertility that has been maintained through the years. These farms generally have higher organic matter, another factor which increases water holding capacity. Too much tillage and operating equipment across soil that is wet leads to soil compaction which diminishes soil condition.

If your farmer is paying rent in installments after harvest, requiring adequate levels of Federal Crop Insurance is in order. Crop Insurance may be a savior for many this year. A farm that has a 180 bu/acre corn yield and a 80% revenue assurance policy had a $820/acre revenue guarantee based upon a $5.68 spring 2012 coverage price. This same farm would have a $502 guarantee on soybeans with a 50 bu/acre proven yield and a $12.55 spring coverage price. The variable production costs (fertilizer, seed, and chemicals) for Midwest farms are roughly $330/acre for corn and $180/acre on soybeans according to University sources. As long as the producer didn’t pay more than $490/acre for corn land
and $322 on soybean land then the variable costs are covered.

Crop insurance coverage levels can be purchased for up to 85% of revenue based on proven yields. In addition, crop insurance can be purchased that allows for a seasonal price increase, should prices be higher in the fall. If there is widespread drought damage, then crop prices will be substantially higher this fall and Federal Crop Insurance can adjust for that. Farm operators and crop share owners that don’t have adequate crop insurance have gambled big this year and this gamble could cost them dearly.

What if the farmer is a livestock producer? First of all, livestock manure as a fertilizer generally helps soil condition, especially when applied at recommended levels and if heavy equipment is not used when soils are wet, which causes compaction. Livestock producers that need to purchase corn for feed will be at a financial disadvantage, if prices are higher this fall. Livestock producers that grow their own corn for feed can greatly benefit from Federal Crop Insurance on their crops. There are other marketing tools the livestock producer can use to protect their feed costs.

The message at this time is that it is still too early to tell about farm profitability for 2012, but it looks like profits should be fine for the row crop folks, if they are good risk and production managers. The take-home message for landowners is that you need to take an active approach to managing your farm investment and you need to know what is going on with your farmland. The better your farm’s soil condition is maintained and soil tilth monitored, the better off you and your tenant will be during adverse weather conditions.

Farm rents and incomes are based upon gross incomes, thus, the higher the gross income then the higher the profit for all. Yields cannot be controlled, but they can be maximized by having the soil ready for the growing conditions. Unfortunately, many farmland owners have very little working knowledge of their farm. The active landowner will find great benefit in active knowledge about their investment, so they can know what is going on which will help to improve the land. US Farm Lease has the tools and knowledge needed in assisting you to achieve maximum profitability for you and your farmer.

As landowners, here are a few simple things you can do to protect your farm:

  • Require federal crop insurance at higher levels of coverage with a fall price increase guarantee
  • Insist on less tillage and higher plant residue coverage on your soil

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