Variables Point to Lower Cash Rents for Next Year

Jesse Newman and Jacob Bunge reported earlier this week at The Wall Street Journal Online that, “U.S. officials are expecting record corn and soybean harvests this fall, a bounty that would extend the multiyear slump in agricultural commodity prices and heap more pressure on farmer incomes.”

The Journal article added that, “The USDA estimates U.S. farm incomes will fall to $54.8 billion in 2016, the lowest level since 2002. On Thursday, Federal Reserve regional banks said farmland values continued to decline in the Farm Belt due to low crop prices and weak farm incomes. Dairy farmers on Friday pleaded with U.S. Agriculture Secretary Tom Vilsack to buy $150 million in cheese to help them through the glut. Farm-supply companies like Monsanto Co., DuPont Co. and Deere & Co. have cut thousands of jobs and curtailed research projects.”

These variables will likely have an impact on cash rental rates for farmers.

Yesterday, University of Illinois agricultural economist¬†Gary Schnitkey pointed out at the farmdoc daily blog (“Continued Downward Pressure on 2017 Cash Rent“) that, “Given low prices, projected 2017 returns will be very low. Even after substantial decreases in non-land costs, many farms will have projected losses in 2018 on cash rent farmland. For farmland with an expected corn yield of 200 bushels per acre, cash rents would have to be below $218 per acre before farmers would be projected to have a non-negative return. A $218 per acre rent is well below current, average levels of cash rents.”

Dr. Schnitkey added that, “Even after substantial decreases in costs, more reduction in non-land costs and cash rents are needed if farmers are expected to have non-negative returns on cash rent farmland. High 2016 production leads to low prices which causing a further need to cut costs in 2017.”

In a related item this, DTN Executive Editor¬†Marcia Taylor pointed out that, “Now, worse prospects for 2017 grain markets mean many cash renters will have little choice but to plead poverty when renewing leases this fall. What’s different this time is that farm lenders will be the referees making sure rent gets knocked down a serious notch or two, some analysts caution.

“Three consecutive years of falling farm incomes from 2014-2016 will have ‘evaporated’ working capital below acceptable credit standards for many producers, cautioned Sterling Liddell, an economist with Rabobank’s Food and Agribusiness Research group. In a new report on cash rents and land values, Liddell wants landowners to get a wake-up call when land rents are renegotiated this fall.”

Ms. Taylor explained in the DTN article that, “Some growers hesitated to have frank talks with landowners last year, for fear of losing their leases to more aggressive farmers. Others know that many elderly owners rely on rents for retirement income, so they postponed rent reductions for as long as possible. Steep property tax increases in Ohio, Nebraska and Indiana already cut into owners’ returns, souring conversations before they started. Now the multi-year farm recession has taken a toll, Liddell said.

“‘At the end of the day, the real gatekeeper on this is credit, the ability to finance. If you simply cannot finance because you don’t have [enough] working capital and value of crop isn’t strong, you won’t have the money to bid into land,’ he told DTN. Bank standards generally require liquid, working capital reserves of at least 20% of cost of production to qualify for credit, he added, and many operators risk flunking that test.”

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