Indications from Chicago Fed and Illinois Society of Professional Farm Managers and Rural Appraisers surveys point to a reduction in cash rents, but even lower rents are needed to maintain returns from rented ground, University of Illinois ag economist Gary Schnitkey writes for farmdoc daily in "Negative Returns and Downward Pressure on Cash Rents."
The surveys from the Chicago Fed and the ISPFMRA indicate that 2015 cash rents have decreased between $20 and $25 per acre from 2014 levels.
If these reductions occur, the majority of farmers still will have negative returns from cash rent farmland given current corn and soybean price levels, Schnitkey says.
"At a $3.75 per bushel corn price and a $9.50 soybean price, cash rents need to decrease from 2014 averages by around $70 per acre before farmer return is zero," he writes. "Even given mid-$4 prices for corn, farmers will not have positive returns given cash rents at 2014 averages."
Operator and land returns
Table 1 shows estimates of 2015 operator and land returns – the returns that can be split between the landowner and farmer.
If operator and land returns are $300 per acre and cash rent is $250 per acre, the farmer will have a $50 per acre return. Operator and land returns are based on revenues, yields, and costs shown in the 2015 Crop Budgets and are averaged over the corn and soybean crops.
Operator and land returns are given for four different Illinois regions: Central (high productivity), Central (low productivity), Northern, and Southern. Even though these are Illinois-specific regions, Schnitkey says returns shown "generalizable to a wider geographical area."
The price scenarios shown are used to determine crop revenue given the expected yields for each region.
Related: What Do Landlords Want?
For example, the expected yields for the Central-High region are 198 bushels per acre for corn and 57 bushels for soybeans. Gross revenue also include ARC/PLC and crop insurance payments, both of which decrease with higher prices.
Longer-run price levels
Current price levels may be below long-run prices, Schnitkey writes. Previous farmdoc analyses suggest that longer run prices may be around $4.60 per bushel for corn and $10.60 for soybeans.
"Obviously these higher prices will result in higher operator and land returns, as is illustrated in Table 1," he writes. "Take the $4.50 corn price and $11.00 soybean price. These prices give $298 per acre of operator and land return in the Central-High region. Note that the $298 operator and land return is near the 2014 cash rent of $293 per acre. At this price level, the operator and land returns for all regions are near the average 2014 cash rent levels. The nearness suggests that cash rents would need to decline if long-run prices are in the $4.50 per bushel range for corn and $11.00 per bushel range for soybeans. In the past several years, increases in cash rents likely overshot levels supported by long-run prices."
The above analysis is based on non-land costs remaining at current levels of roughly $600 per acre for corn and $370 per acre for soybeans. Decreases in fertilizer, seed, and chemical costs could reduce the need for decreases in cash rents.
Ultimately, expected 2016 commodity prices during the fall of 2015 will have a bearing on pressures place on cash rents. Pressures, however, will be reduced with higher price expectations.
"For farmers to have positive expected returns without cash rent of non-land costs, corn and soybean prices respectively need to be in the high-$4 and mid-$11 range," Schnitkey writes.
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