What will you do about cash rent in 2014?

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Cash rental rates for 2014 have already been discussion topics for farm operators and landowners, since the late 2013 harvest may spill into that typical discussion period.  And many operators have expressed their desire for lower rental rates, or at least lower base rates for flexible cash rent agreements for 2014.  Owners may look at that with some skepticism based on higher land values and high commodity prices in recent years.  However, with projected prices for the 2014 crop, there will be a lower return to land.

With the recent trend toward higher commodity prices, the 2014 cropping season provides a particular challenge for many operators due to prospects toward lower grain prices.  Many are working on farm budgets, due to the pressures by seed dealers to get orders placed for 2014 and the looming need to lock in farmland leases for the coming year.  While some landowners will understand the economics, if they had farmed the land in the past, others may not appreciate the cost-price squeeze that will be on nearly every corn and soybean farmer in the coming year.  It will be up to the operator to educate them, and some of those discussions may be met with varying degrees of success.

Iowa State University farm management economist Kelvin Leibold has issued his perspective on farmland leasing for 2014.  He reports typical rents being paid, not the highest or lowest based on anecdotal information, but based on information from those familiar with land rental markets.  But it also relates the rent to the recent crop yield trends and the suitability of the land for corn production, assigning a dollar value to each point on the corn suitability rating for the land.  As an example, he says Iowa farmland rental rates range from $1.40 to $1.80 per bushel, whereas the typical rental rates in North Dakota are 50-cents per bushel.  That makes it more profitable to grow corn in North Dakota says Leibold and the reason for the explosion in corn acreage.

But that is all changing, says Liebold, “When landlords and tenants establish rental rates they often look at the following: what others are paying, average crop yields, CSR Index, share of the gross crop value, the return on investment, percentage of the crop and the tenant’s residual. The factors affecting next year’s rents are looking different than what we’ve seen the past several years.”  He is telling owners and operators to look at the difference in prices from the high dollar 2012 crop to the harvest price being offered for fall 2014, “The result is that it looks like many farmers will see offers for 2014 corn at prices that are almost $2 per bushel less than what the market was offering on old crop corn just a month ago.”

Consequently, he says the lower corn prices will make it more difficult for operators to meet the costs of other inputs, including land rent, which has risen about 50 percent in the past five years, he says.  And he adds, “A recent Iowa State University survey looking at land tenure indicates that about 16 percent of the cash rent leases in Iowa have attempted to balance out some of the risks of price and yield volatility by going to some type of flexible cash rent lease. As volatility continues for both grain prices and crop inputs, we may see more usage of flexible leases across the state.”  Liebold says many of the cash rent leases will have to be reviewed, based on the fact that rental rates are now on the high side for the level of productivity for that land.

Summary:

Lower corn prices will make it more difficult for farm operators to pay higher cash rents for farmland as seen in the past few years.  Rents have risen an average of 50 percent over the past five years along with higher commodity prices.  With corn prices dropping rapidly for the 2014 harvest, the ability to pay high rates of cash rent will be challenged.

Source: Farm Gate Blog


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