The $4.50 corn and $10.50 soybean price represents estimates of average prices over the next five to ten years (see here for more detail). At these prices, operator and farmland return for central Illinois with high-productivity farmland is $341 per acre, $169 lower than the $510 per acre return estimated using 2013 price expectations. A $325 cash rent, results in a $16 farmer return ($16 = $341 operator and farmland return - $325 cash rent). The $16 will not provide enough return for the farmer to cover implicit costs of unpaid labor and equity capital. If prices remain at these long-run levels for several years, cash rent levels likely would face downward pressures.
The $3.50 corn price and $8.50 soybean price represents a below average price scenario compared to long-run prices. Sometime in the future commodity prices likely will reach these levels, perhaps staying at these levels for several years. These prices have happened relatively recently, with corn prices averaging close to $3.50 in 2009. The $3.50 corn price and $8.50 soybean price scenario has a $172 per acre operator and farmland return (see Table 1). A $325 cash rent results in a -$153 per acre loss to the farmer. Farmers would likely face losses at these price levels.
Several key points result from the above comparisons. First, it is difficult to set cash rents in the current price environment at levels that will not have to be revised in future years. For example, one strategy could be to set cash rents based on long run prices ($4.50 corn price and $10.50 soybean price) and then leave those rents unchanged in future years. This strategy would result in cash rents that are significantly below those being currently negotiation. For central Illinois with high-productivity farmland, long-run prices result in a $341 per acre operator and farmland return, suggesting cash rents in the low to mid-$200 range. A mid $200 per acre rent is significantly below average cash rents in central Illinois, where several counties have average cash rents above $300 per acre (see here). Cash rents in the low to mid-$200 range for high productivity farmland would result in high farmer returns over the past several years.
Second, the cash rental market could look fundamentally different in the future if corn and soybean prices are lower. A return to lower prices would result in much lower operator and farmland returns, leading to downward pressure on cash rents.
Third, one of the results of rising cash rents and volatile price environment is that farmers are taking on much more risks, as pointed out in this farmdoc daily post (here). In recent years, revenue declines have not resulted in widespread losses to farmers. In some year, revenues will decline after cash rent rates have been set, such that farmers will take losses.
Finally, in my opinion, several years of lower prices will be transmitted to many landowners in the form of lower cash rents. 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.