Minding Ag's Business

Three Years of Losses Hold No Charm

For the record, farm renters report a standoff in 2016 cash rent negotiations. That likely means even those paying "average" rents for their area will need to dig into farm savings to cover operating losses for the second or even third year in a row. Given the potential for an extended downturn in the farm economy, many economists question the wisdom of that move for 2016 and beyond.

Truth is rents have been stubborn to budge. Roughly half of approximately 350 farm operators surveyed online by DTN in December report little or zero change in their cash rental rates since corn prices peaked in 2013. Another 23% reported that average rates had fallen less than 10%. About 15% say their 2016 averages had actually gone up in the past three years, despite the collapse of commodity prices. In a separate question, the vast majority of operators said their 2016 cash rental rates had not been finalized.

Rents stuck in over-drive already contributed to major losses on many Midwest cash rented farms in 2014 and 2015, land grant university economists say. For Illinois operators paying an average of $288/acre cash rent last year, University of Illinois economist Gary Schnitkey estimates a $124/acre LOSS on 2015 corn. He conservatively assumes average rents may dip only about $30/acre and fertilizer costs $31/acre in 2016--not close to the $100/acre budget savings he recommends operators need to consider. (High-cost operations would need to pare more).

Some landowners keen on holding corn rents at $300 to $350/acre argue big yields negated losses in 2015, giving operators another lease of life. "Higher yields would soften the losses and help quite a bit, but not likely to erase them," Schnitkey counters. "Who is more profitable than others will come down to land control costs."

Even if farm renters can afford to pay a premium to retain rental rights, economists at Purdue's Center for Commercial Agriculture want growers to analyze whether the cost will be worth the sacrifice. They have developed a cash rent analysis tool that not only simulates your breakeven cash rent through 2020, but tracks the impact on your liquidity over the long-term. You can plug in your own price forecasts, or use professional estimates from FAPRI, the same analysts who advise Congress. Just remember alarms go off when farm lenders see crop operations starting a year with a ratio less than 30% of working capital to revenue.

Most lenders also will take a very dim view of multiple years of negative returns, particularly if they are close to the magnitude of the losses Purdue now depicts. "But we are not confident that all cash rent bidders are fully cognizant of the potentially large losses they are facing at the reported cash rents bids for 2016 and beyond," says James Mintert, director of Purdue's Center for Commercial Agriculture.

Mintert knows growers hesitate to give up leases, even when they're losing money. He likens the situation to the oil and gas industry that pays a premium per acre for the option to drill in the next five years. Here farmland renters are paying an option premium to farm in the future. Growers need to ask what happens to their working capital if nothing changes over the next five years. "It's usually pretty ugly," he says.

What's more, consider how many years you'd need to farm the land afterwards to recoup those losses.

To test Purdue's 2016-2020 cash rent analyzer, go to https://ag.purdue.edu/…

To read Schnitkey's latest cash rent budgets for 2016, go to http://farmdocdaily.illinois.edu/…

Follow Marcia Taylor on Twitter@MarciaZTaylor


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andrew mohlman
1/11/2016 | 8:07 AM CST
Marcia how large were the losses per acre in the farm crises of the 80s?
Raymond Simpkins
1/9/2016 | 12:29 PM CST
How does that work? 17 added bushel at 3.50 gains you 59.50 per acre. So at a negative 86.00 an acre plus 59.50 you are still 26.50 in the hole. Plus added inputs to get the extra bushels. Mother Nature is still are biggest yield factor. She makes or breaks yield.
Marcia Taylor
1/8/2016 | 11:09 AM CST
Raymond, I don't have all the answers but I do read our copy and your comments. Aiming for yield is a farmer's self defense. At $3.50 corn, "average" costs and 193 bpa, Minnesota growers stand to lose about $86/acre on average in 2016, according to Univ of Minn estimates. If they can bump it up to 210 bpa, they'd eke out a $58/acre profit. Let's just hope weather someplace else dings global supplies or export demand perks up. Supply controls don't work too well--just watch how OPEC is controlling the glut of global oil.
Raymond Simpkins
1/7/2016 | 7:30 AM CST
Just read on DTN fertilizer trends one guy from South Dakota is going to fertilize heavy,hoping to make it up in bushels. Smart move,just what we need is more bushels of anything. So grain prices will be even lower in 2017. Your playing right into the fertilizer and chemical companies hands. Do you see oil companies drilling new wells everywhere now that oil prices are low. Think about it people we can control the market to some extent.
H. Clay Daulton
1/5/2016 | 8:49 PM CST
Re: Simpkins's comment: As a freshman at OSU (Oregon) in 1961, Dr. Mumford taught us in Ag Econ 101 that almost all agricultural commodities are produced at quantities far beyond maximum return to industry and, therefore, to individual producers as well. I believe the same was taught everywhere. There's nothing new to add in the intervening 55 years, and government programs insure that same-old, same-old will continue. Unfortunately for those of us in agriculture, we are a solid nation because our basic food supply is many times what it needs to be for subsistence. As a producer and active industry participant, I have always worked toward reducing absurdly incentivized supplies and fair trade as opposed to free trade.
Raymond Simpkins
1/5/2016 | 12:25 PM CST
Does anyone at DTN read what they write? You guys are advising farmers to farm at a loss for a few years just so maybe just maybe we will survive to farm in the future. Thats really good business and advise. I am not going to burn up my savings for the hell of it. Farm what you can and farm smart,let the next guy go belly up then you can have your land back. One minute your telling everyone to cut cost,then they run an article on no-till and that guy is using almost 300 pounds of nitrogen to produce 225 bu. corn. We get yields that high with 120 pounds. So why does DTN promote these guys? We need to cut yields not increase them. We would be better off growing 125 bu.corn than we are growing 200.
H. Clay Daulton
1/5/2016 | 8:38 AM CST
Deflation has become accepted, in a politically-correct sense, in many developed nations but so far not here. Negative interest rates now exist in some European nations. Regardless of the acknowledgement or not, look out!
1/5/2016 | 8:16 AM CST
Excellent article. I think we are living in a dream world if we think the profitablity in farming is coming soon.