Don't Bet the Cash Rented Farm on a Loss

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Don’t Bet the Cash Rented Farm on a Loss
Gary Schnitkey, Extension Agricultural Economist - University of Illinois

It is very difficult to give up a farm, even one that is losing money because the cash rent is too high. Todd Gleason has a few simple guidelines one might follow to help them make that decision.

Those farmers thinking they can withstand a loss…
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Those farmers thinking they can withstand a loss on a farm next year because the cash rent is too high should put things in a longterm perspective to see if it is viable strategy. First and foremost says University of Illinois Agricultural Economist Gary Schnitkey realistic expectations of future returns should be used.

Schnitkey :28 …question if those rents are sustainable. If they are not, then lower those rents.
Quote Summary - It is about long run prices. It has been suggested $4.60 corn and $10.60 soybeans. Some years we will be above that and some years below that. But if we are looking at our cash rent levels and plug in $4.60 corn and $10.60 soybeans and there are losses, or only small gains, then you must question if those rents are sustainable. If they are not, then lower those rents.
Here’s the thing about using the long run corn and soybean mid-point prices. Those are calculated for thirty years worth of trade. USDA’s price outlook through 2020 doesn’t even get close. It’s a lot more like current prices and that’s a whole different set of expectations. Even if you thought, “just one more year, and the cash rent will come down to a more reasonable level”, that might not be the case.

Schnitkey :44 …high yield level compared to other parts of the corn belt.
Quote Summary - At our long run prices, $4.60 for corn and $10.60 for soybeans, an appropriate cash rent for central Illinois would be about $250 per acre. That cash rent would generate a loss at the budgeted prices we are using for 2016, which are $3.90 for corn and $8.90 for soybeans. So, if we are at those prices even a $250 cash rent would cause losses. Rents would need to go below $220 per acre in central Illinois. Obviously this is at a very high yield level compared to other parts of the corn belt.
Even if a farmer believes the University of Illinois long-run prices of $4.60 corn and $10.60 soybeans are accurate, there could be a relatively long period in which prices are below the long-run average. These risks suggest using a variable cash rent lease might be the best answer.

Schnitkey :25 …it allows the landlord to share the upside.
Quote Summary - Variable cash leases vary the cash rent based on revenue. There is a base cash rent and if revenues go above a specified level the landlord will get more return. This is a good idea in this time of low prices because things happen in agriculture and it allows the landlord to share the upside.
You can read more about the risks of high cash rent farmland and variable rate leases on the Farm Doc Daily website.