Land Rent Ceilings

January 5, 2013 07:55 PM

A simple formula shows maximum rates.

We’ve all heard the stories about land rents gone wild: $400 per acre. $500. Even $550.

Corn and soybean growers have been bidding those rents up, hoping to spread their fixed costs of machinery ownership over more acres.

But does it make sense to get in the cropland bidding war if you’re a dairy farmer hoping to hedge feed prices? That’s the $400 or $500 per acre question, says Chris Wolf, a farm management specialist with Michigan State University.

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In the past, it was cheaper to buy corn and even corn silage. For example, farm records from Michigan 10 years ago show it cost about $2.90 per bushel to raise corn and $30 per ton to raise corn silage. That didn’t make a lot of sense when you could buy corn for less than $2 per bushel and silage for $25 per ton.

The only crop that made economic sense to raise was alfalfa hay. Growing costs were about $95 per ton. But good-quality dairy hay was already at $100 per ton or more.

Fast-forward a decade to 2013 feed prices. If you have to shell out $7 per bushel for corn, raising that corn on rented acres might make sense. It all depends on the yield potential of the ground and the rental rate you negotiate.

University of Illinois farm records show that non-land costs for raising corn exceed $500 per acre. That includes seed, fertilizer, pesticides, dry storage, crop insurance, machinery, fuel and oil, depreciation, labor and interest.

In 2012, those non-land costs totaled $520 per acre for ground with a yield potential of 175 to 195 bu. per acre. The projected costs for 2013 are similar, Wolf says.

"You can calculate your break-even land rent across corn price and yields given non-land costs of $515 per acre," he says. Even better, use your own projected costs.

To calculate the maximum rent you can afford, use this fairly straightforward formula: (yield × feed cost in dollars per bushel) – non-land feed cost in dollars per acre.

p32 Land Rent Ceilings Chart

At $5 corn and 160 bu. per acre corn yield, maximum rent is $285 per acre. But at $7 corn, maximum rent jumps to $605 per acre.

If the potential of the land is 200 bu. per acre, $5 corn shows a maximum land rent of $485 per acre. And $7 corn jumps the maximum to $885 per acre.

Obviously, that doesn’t mean you should pay that amount, Wolf says. But it does show you how much you can pay and break even.

On the other hand, the table shows that if you can rent an acre of land for $300 and it has a corn yield potential of 160 bu. per acre, you’re locking in about $5 per bushel cost.

It’s really another form of risk management, Wolf says. You could lock in the $5 corn through forward pricing or a futures contract. But if you have the machinery, storage and labor to grow corn, it’s another way to more fully utilize those assets.

The tool might be particularly helpful if you must rent additional ground for corn silage. Growing your own silage often allows you to better control hybrid selection and harvest management.

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