On highly productive soils, profits are likely
Average cash rents might allow farmers to earn a small profit margin in 2014, but that’s not the case for those who are at the upper end of land lease costs.
On highly productive soils in central Illinois, $30 per acre profits are likely for 2014, assuming average cash rent of $300 per acre. However, with cash rents of $75 per acre higher than that, or $375, a typical corn/soybean farm is estimated to lose $45 per acre in 2014, according to projections by Gary Schnitkey, University of Illinois ag economist. Losses are far greater for farmers paying exceptional land rents in the $500 range, he acknowledges.
"In most cases, farmer returns at average cash rent levels for 2014, will be marginal. Cash rents will retreat, but it’s too early to know how fast and how far."
At $500 rents, losses reach as high as $170 per acre in central Illinois, keeping all other variables constant and using University of Illinois budgets. While high cash rents have grabbed headlines, they are not the norm, Schnitkey adds.
If high-end rents equal high-end production, the numbers come out differently. For example, if land rented at $500 provides yields of 250 bu. per acre instead of 195, an additional $253 per acre in corn revenue is generated, more than enough to offset the higher rental price on the corn acres rented. That assumes no additional input investment would be required. Averages, while important on a macro level, don’t always tell the entire story.
"In most cases, farmer returns at average cash rent levels for 2014 will be marginal," Schnitkey says, but negative on high cash rent land. Most experts believe cash rents will retreat, but it’s too early to know how fast and how far.
"It depends on the willingness of farmers to take losses on high cash rent farmland," Schnitkey says. He does not look for a softening of cash rents for 2014.
In Midwest states, land rents are actually spiking higher for 2014, although the rate of increase appears to be moderating. In Cedar County, Iowa, a tract of land recently went for $525 per acre in a two-year rental auction, suggesting some farmers are still willing to pay top dollar, says Mike Duffy, ag economist at Iowa State University.
With the outlook for $4 corn, Duffy has a hard time seeing positive returns with cash rents much higher than $200 to $300 per acre.
"The rubber will meet the road on cash rents in 2015," Schnitkey says, as farmers adjust to the new crop price reality and make changes.
Does It Pencil Out? It’s prudent to evaluate financial returns with and without high cash rent acres. Financial results could improve if high rent acres are not farmed and the farm lessens in size.
It also can work the other way. Dale Nordquist, University of Minnesota ag economist, says to
calculate total farm impact before letting high-priced farmland go. Minnesota data show that not renewing leases on high cash rent parcels in some cases can actually increase break-even levels. That’s because fewer acres farmed drives up machinery costs per acre.