Another variable: Value of corn and beans changed dramatically over the last 50 years.
To help farmers decide how much land can be worth, Horner converts land price from dollars to bushels of corn.
His chart shows that in 1980, mortgage payment took 80 percent of the gross corn income from an acre. Last year, with record yields and prices, land payments dropped to 35 percent of corn gross.
Rush out and buy high-priced land, right? It’s easy to pay for in bushels of corn.
Horner the economist showed his other hand. He asked, “What price will you put on that bushel of corn?”
Possibilities are a historic average for 50 years, the 2011 price, last month’s price or the FAPRI baseline price for 10 years ahead. They all differ.
While commodity prices may vary, production costs continue upward.
“Reality isn’t always clear,” Horner says. Learning the capital debt-repayment capacity requires a serious look at each farm’s ability to generate cash.
Horner took the group through his budget, based on prices of $4.50 a bushel for corn and $9 for soybeans. “This is how I’d help a farmer work through this,” he said.
In his calculations, Horner added no off-farm income to the budget. He recalls that in the 1980s income from a spouse made it possible for farms to survive. But with changes in prices, that $20,000 income might not carry much weight.
Working through his budget, assuming a corn-soy rotation with his $4.50 and $9 prices—with no extravagant family living—he maxed out at about $200 per acre per year to service debt. That includes $100 for non-land debt. But only $100 is available for the mortgage.
While Horner remains optimistic, he adds caution in his advice to farmers. “This could be another bell-ringing year.” But, he admits, “It is easier to look back than to look forward.”