According to a FarmDoc Daily article out last week, farmers are willing to take losses on cash rent in the short term, hoping to preserve ground for longer term gains. While understandable, this strategy is risky and could see farmers with significant losses over time.
“As a result, some farmers will consider paying cash rents resulting in negative returns in the next year, believing that returns will improve in the future. If this strategy is followed, realistic expectations of future returns should be used. Prices of $4.60 for corn and $10.60 for soybeans have been suggested as long-run prices. If farmer returns are negative or low at these long-run prices, expectations of generating positive returns in the future do not seem prudent,” writes Dr. Gary Schnitkey, University of Illinois.
The background to this assumption is a recent survey reported on AgWeb that indicates 40 percent of farmers would walk away from high cash rent farmland, while 60 percent would keep renting the ground.
Dr. Schnitkey walks farmers through calculations and examples of cash rents based on long-term prices. Farmers would still realize a loss at today’s prices, but could hope to make a return in the future if he or she can weather the current economic climate.
However the plan is very risky.
“While these long-run prices seem appropriate, there could be a relatively long period in which prices are below the long-run average. As an example, prices were below long-run averages in the late 1990s and early 2000s. Therefore, a farmer could take significant losses for years before a positive return again occurs. Moreover, the estimation of long-run prices is not exact. Long-run prices could be lower or higher. Lower long-run prices would cause setting cash rents based on those long-run prices to be an unprofitable venture.
“On the other hand, lowering cash rents by these large amounts could also be a risky strategy for landowners. Lowering cash rents will reduce a landowner returns, and it is possible that revenues may be above current expectations.
“These risks suggest using a variable cash leases such as a cash rent with bonus (September 9, 2015). Base levels in the $180 to $200 per acre range could be set for farmland with expected corn yields near 200 bushels per acre. Revenues then could be shared above a base level,” he writes.
Read the full article here to fully understand Dr. Schnitkey’s calculations and recommendations.