A question heard frequently these days: "How is the drought and excessive heat going to affect my cash rent?" It is being asked by both landowners and tenants. The best answer is, "It's too early to tell." People are also asking, "Are farmers going to survive?" In many parts of the Midwest, the answer to these questions depends on a farmer's financial stability, marketing talents (or luck) and on good soil tilth and crop insurance.
In the following article, Mark Gannon and Kevin Brooks of U.S. Farm Lease, a company based in Ames, Iowa, offer their ideas and observations on this situation. They are farm management consultants who work with both landowners and tenants in developing farm lease agreements. If you have questions or need more information, contact Gannon and Brooks at 877-232-4002 or by email at [email protected].
Forward pricing and crop insurance will make big difference
Row crop agriculture, in general, has had good years for a while; enabling many operators to build up equity and reserves, which will help carry them through leaner times. Some who took this opportunity to expand in various areas, such as buying equipment, buying land or renting more land, may be second guessing themselves but may still be fine financially depending on how they handled their financial and production risk.
If they rented land that was adequately protected by crop insurance or if they had adequate financial reserves, they should come through this year in ok shape. If the producer chose lesser amounts of crop insurance coverage or spent extra cash reserves, then, the picture becomes less clear.
Marketing is always a key to profitability. Studies show producers are better off in most years by marketing their grain early. The main thing that can hinder this strategy is adverse weather. A big concern during years of adverse weather is when farmers forward-sell more bushels than they grow. With this year's drought, a number of farmers now may not grow enough grain to cover their marketing contracts.
What if you forward-sell more bushels than you end up producing?
The forward marketing strategy can easily be protected by using federal crop insurance. If a producer doesn't adequately insure and has substantial yield loss, he/she will have to buy corn that is more expensive to fill their contract obligations. Marketing procrastinators who chose not to market their crop early will be ok in this regard, if they grew adequate bushels or have adequate crop insurance. However, procrastination is not a habit of farmers who are good financial managers.
So what can landowners do to protect themselves during adverse weather years, such as 2012? The first line of defense is to select a great tenant who is conscientious about keeping the farm soils in good condition. Farms with good soil condition (tilth) are the farms that are most ready for drought years. They have favorable soil structure for increased water holding capacity and natural fertility that has been maintained through the years.
These farms generally have higher organic matter soils, another factor which increases water holding capacity. Also, keep in mind that too much tillage and operating equipment on soil that is wet leads to soil compaction which diminishes soil condition.
Crop insurance will be savior for many farmers this year
If your farmer is paying rent in installments after harvest, requiring adequate levels of federal crop insurance is in order. Crop insurance may be a savior for many this year.
A farm that has a 180 bushel-per-acre corn yield and an 80% revenue assurance policy has an $820 per acre revenue guarantee based upon a $5.68 spring 2012 coverage price. This same farm would have a $502 guarantee on soybeans with a 50 bushel-per- acre proven yield and a $12.55 spring coverage price. The variable production costs (fertilizer, seed, chemicals) for Midwest farms are roughly $330 per acre for corn and $180 per acre on soybeans, according to university sources. As long as the producer didn't pay more than $490 per acre in rent for corn land and $322 for soybean land, then the variable costs are covered.
Crop insurance coverage levels can be purchased for up to 85% of revenue, based on proven yields. In addition, crop insurance can be purchased that allows for a seasonal price increase, should prices be higher in the fall. If there is widespread drought damage, then crop prices will be substantially higher this fall and federal crop insurance can adjust for that. Farm operators and crop share owners who don't have adequate crop insurance have gambled big this year and this gamble could cost them dearly.
Livestock producers who need to buy corn will be hit hard
What if your farmer/tenant is a livestock producer? First, consider that they offer a benefit, as livestock manure as a fertilizer generally helps soil condition, especially when applied at recommended levels and if heavy application equipment isn't used when soils are wet, which causes compaction.
Livestock producers who need to purchase corn for feed will be at a financial disadvantage, if corn prices are higher this fall. Livestock producers who grow their own corn for feed can greatly benefit from federal crop insurance on their crops. There are also other marketing tools livestock producers can use to protect their feed costs.
Landowners need to take active approach to managing their farm investment
The message at this time is it's still too early to tell about farm profitability for 2012, but it looks like profits should be fine for row crop folks, if they are good risk and production managers. The take-home message for landowners is you need to take an active approach to managing your farm investment and know what's going on with your farmland. The better your farm's soil condition is maintained and soil tilth monitored, the better off you and your tenant will be in adverse weather years.
Farm rents and incomes are based on gross farm income, thus the higher the gross income, the higher the profit for all. Yields cannot be controlled, but they can be maximized by having the soil ready for the growing conditions. Unfortunately, many farmland owners have very little working knowledge of their farm. The active landowner will find great benefit in gaining a better knowledge about their investment, so they can know what's going on which will help improve the land and profitability of the farm.
Managing your land in turbulent times, communication is critical
Tremendous volatility in grain prices, rising input costs and soaring land values the past several years have created lots of anxiety in the farmland rental market. Now in 2012, Mother Nature steps in with a serious drought in much of the Corn Belt.
Good communication between tenants and landlords is one key step to developing and maintaining a harmonious rental relationship that's built on trust and is profitable for both parties, says Mark Gannon, president of U.S. Farm Lease, a firm that works with landlords and tenants and is based in Ames. Stress and uncertainty will be more common as rental agreements are negotiated for 2013.
"Our company has the tools and knowledge needed in assisting landowners in working with their tenants to achieve maximum profitability and preserve a good relationship," he says. Problems with lease arrangements are more common in an environment of increased economic uncertainty. Gannon is advising landowner clients there are a couple things they can do to help protect their farm. One is to require in the lease that federal crop insurance be at higher levels of coverage with a fall price increase guarantee. The second thing is to insist on less tillage and high amounts of crop residue cover on your soil.