DTN Blog of the Week

Minding Ag's Business

Controlling cash rent and production costs remains the name of the game for the year ahead.

Let's not kid ourselves. Some landlords continue to believe their tenants are making money with excessive $350 or $400 rent, far above the $250 averages in much of the Midwest.

In contrast, every one of the commercial Midwest and Southern growers I've visited with since June has fessed up to sizable equity losses due largely to rented land in 2015. One 17,000-acre corn-soy grower recently showed a $2 million hit; another 10,000-acre Iowa operator said he lost $600,000. Delta farmers suffered bruising yield losses. By University of Illinois estimates on farmdoc daily, typical cash renters lost $101/acre in equity in 2015 while those who owned their land lost about $1/acre. See http://farmdocdaily.illinois.edu/…

The good news is some of the gloom has lifted for corn and soybean producers this season. On June 28, University of Illinois economist Gary Schnitkey updated corn and soybean budgets for the state. On high productivity soils, renters may eke out small profits in 2016, Schnitkey now says, due largely to soybeans' improved price prospects since last December. See his post on farmdoc daily at http://farmdocdaily.illinois.edu/…

The problem remains that if corn averages only $3.85/bu. this season, or if yields merely track trend line, those who pay average rents of $268/acre in Central Illinois will continue to lose money on corn for the fourth year in a row, the Illinois economist estimated. That financial pain should be the impetus for more serious rent concessions and input negotiations for next year's crop season, Schnitkey added.

A year ago, Schnitkey warned Midwest cash renters would need to be slashing corn budgets by $100/acre on 2016 crops. In most cases, average rents slipped maybe 5%-10%, a down payment but not enough to cover the deficit. Likewise, input cuts were modest: Granular customers reported 2016 chemical costs fell a modest 9%, fertilizer 8% and seed a mere 1%, compared to 2015 prices.

By Schnitkey's budgets, Illinois growers will still need to shave $9/acre off corn budgets if nothing changes, just to break even. Most people would want at least another $50-$75/acre to show some ROI for their efforts.

So who will blink first on 2017 negotiations, landlords or input manufacturers and suppliers?

Institutional land owners -- those investors who may have recently purchased farmland at peak prices and now require a 4% return to stockholders -- have resisted rent concessions. If they paid $8,000/acre for farmland, for example, they need $320 rents to meet goal.

A few weeks ago, Paul Pittman, CEO of Denver-based Farmland Partners, told me, "It's not a rent problem, it's the inputs that need to come down 50%." His 100,000-acre farmland real estate investment trust is offering tenants a bulk buying program so they can receive pre-negotiated rebates with seed and chemical companies. In essence, that could give 1,000 to 2,000 acre farmers the buying power of 40,000 acre farmers, he argued, helping to keep Farmland Partners' rental rates afloat.

On the other hand, seed experts continue to tell DTN they feel companies are selling technology that pays, so they will resist price discounts as well.

"If you're offering newer hybrids that offer better yields, farmers continue to be willing to share part of that value with you if they're confident they are going to get the increased yield," says Jim Borel, former executive vice president of DuPont agriculture who now serves on the board of directors for Farmers Edge. "Not all of it. Maybe half of it. And three bu. an acre is not what it was worth in 2010 or 2012. But it is still worth something. I don't expect decreases in seed costs per se in 2017. Farmers may shop a little harder, but it is pennywise and pound foolish to cut back on quality seed and end up with lower yields. It doesn't work."

Given prospects for another year of tough corn economics, farmers will need to be creative with costs. Let the negotiations begin.

Follow Marcia Taylor on Twitter @MarciaZTaylor

-- Posted by Marcia Zarley Taylor at 2:42 PM CDT 6/30/16

(CZ/AG)