Consider adding a variable policy to your base price
Most Corn Belt producers at least have handshake deals on cash-rented acres for 2017. Will corn prices support cash-rented land? For an Illinois farmer, corn has to be $4.50 per bushel and soybeans $9 per bushel to make cash-rented land pay, says Gary Schnitkey, ag economist at the University of Illinois.
“We’re a long way from those levels,” Schnitkey says. “Break-even cash rent would be $200 per acre
for 200-bu. corn, $185 per acre for 185 bu. per acre and $100 per acre for 163 bu.”
Cash rents have come down over the past year, according to USDA (see chart below). The market is likely to see a ongoing decline in rental values because it doesn’t pencil out with $3.50 corn, he says. Farmland ranging from excellent to poor saw a decrease of $20 or more per acre in a recent survey by farmdoc Daily.
Beyond the national level, state-level farmland management groups say they expect rental-rate declines. “We’ll continue to have historically low interest rates, and we’ll likely see land-price declines, but those low interest rates will keep land from not decreasing as quickly as we might anticipate,” he says.
Farmers have two options: switch to soybeans or consider a variable cash-rent agreement, Schnitkey says.
“Think about planting more soybeans because it’s more profitable than corn at this time,” he says.
Farmers can also negotiate a lower base rent, then add a variable cash rent on top of the base price. Variable cash rents can be structured by price, weather or water availability. For example, a farmer with high-producing land might structure cash rent with a base price of $150 per acre—an additional $50 per acre if the price of grain sold by the renting farmer is within 50¢ of the average sales price—or an additional $100 per acre if the price of grain sold is more than $1 above average.
The adage that cash rent should be equal to 4% of land value probably won’t work next year, according to Schnitkey.