Minding Ag's Business

The Lean Don't Worry About $4 Corn

By  Marcia Zarley Taylor

There's a lot of" woe-is-me" sentiment at farm meetings this winter, now that frigid temperatures match the mood of commodity markets. But I'm spending part of this week in Florida with about 150 of North America's largest-scale farm operators, and I'm not sensing financial depression here. This is the annual AAPEX meeting, an alumni association of Texas A&M's management course TEPAP (The Executive Program for Agricultural Producers) . Just to give you an idea of how some of agriculture's most adaptable operators think:

--Owner-operator landowners hold the advantage. $4 to $4.50 corn is breakeven only when you factor in fixed cash rents averaging about $275/acre or $300/acre. An operator who holds title to large chunks of land debt-free thinks his breakevens run closer to $2.50/bu. on owned land, so that will be a margin that gives him a partial cushion compared to those who rent the bulk of their base.

--Flex rents hit stride. Some big operators fuss that flex rents are too hard to explain and too much trouble to administer. Some also contend that flex terms set by farm management groups set base rent too high, so don't really offer any consolation during today's big corn price drops. Some of those professional landlords want $300/acre, plus shares above that. However, operators who have written their own flex rent formulas and who have deep landlord relationships swear otherwise. 

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"The key here is that our landowners want us to succeed and understand ag may have some rough patches ahead, so they will be reasonable with us," says one flex-rent devotee who didn't mind paying $400 rents when cash corn averaged $7. Land rents in his neighborhood have been running as high as $350 to $400/acre, and his flex-rent formula paid $366 in 2013. If corn should average $4 in 2014, however, his flex formula would automatically lower rent to about $225.

On irrigated land, flex formulas don't need to be complicated. When corn is $2.50/bu., he starts at a base rent of $150 an acre on land with 200-bushel corn potential, then increases $1 per acre for each 2-cent increase in corn based on the Farm Service Agency’s posted county average price. Price is averaged Nov. 1 for the previous year. (Dryland farmers would need something that offset their yield variability.)

Looking ahead, more conservative farm operators have resisted the temptation to pay $500 rents or set new records at land auctions. They believe a number of their neighbors will lose money on every acre of corn they produce this year and will burn through whatever working capital they have saved. That will uncork farmland markets and allow them to rent or buy at bargain rates compared to today's prices. They wonder why farm magazines never write about them.

Follow me on Twitter@MarciaZTaylor.

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Comments

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David Gerwin
2/16/2014 | 7:19 PM CST
There are those in any business who really think that they can beat the odds. It isn't totally greed. I worked for a very small design engineering firm until my retirement 4 years ago. We had competition who would make unrealistic bids on projects and unrealistic schedule promises. They grew at a time when work was readily available but folded when times were tough. But in the process they but some good design firms out of business. We were fortunate to have a few clients who stuck with us and the company is still in business but barely. Farming is like this also if you are put out of business when rents reach unrealistic levels you can not get back in. Life isn't fair in any business.
Bonnie Dukowitz
2/12/2014 | 8:09 AM CST
RJZ There is a difference between greed and the opportunity of success in the free enterprize system. After thinking about the situation and Brookes post, I do not think most people are obsessed with greed. Some, of all size operations, unfortunatly are.
RJZ Peterson
2/11/2014 | 2:27 PM CST
Let me ask all of you something... If it wasn't for "greed", how would anybody flurish at all? Greed is a term used by the less fortunate looking at the "BIG GREEDY Farmers and Companies" with a jealous eye. I myself am a 28 year old, small farmer(less than 1000 acres, all cash rent by the way) and I don't like to look at things that way at all. If I spend all my time being jealous of other larger farmers I would lose track of my own operation. Yes, it is frustrating trying to compete with those large operations on land rent, but I move on and try to find landlords that are willing to work with me not against me. However, the lack of direct payments in the new farm bill will hurt the large farmer who is paying huge cash rent more than it will hurt me who is paying reasonable cash rent. Just remember greed and jealousy go hand in hand. Also, there always has been and always will be financial inequality in this world, learn to deal with it. Your financial well being is nobody's responsibility but your own.
Bonnie Dukowitz
2/9/2014 | 9:09 AM CST
I would like to comment on your statement, Brooke. It is too bad most people and companies, including farmers, fall victim to it.
Brooke Rossnagel
2/7/2014 | 12:41 PM CST
Greed is a disease that weakens the mind and destroys the sole, its to bad most farmers fall victim to it. Speaking from personal experience and Hoping that some day common sense will prevail.
paul coco
2/7/2014 | 9:55 AM CST
if the average farmer bought more biofuels , there would not be $4.00 corn
Bruce Cumberland
2/6/2014 | 8:54 PM CST
Marcia, This article is disturbing. I think it's interesting how history repeats itself. IN the 80's people were slobbering at the mouth over price of grain and land was in a bull market. Then the money shifted away from Ag and went chasing the stock market until the crash (1987). But while the Ag sector was seeing money exit it. . . . . the cattle market was going gang busters. People in the cattle business were selling their herds to chase the grain market during the land and grain boom. Look at today . . .people tearing up pasture and selling their herds while they were caught up in the Bull Market of $7 corn. When the lie of the shortness and the sky is the high for grain came last year and pulled the rug out from the producers, it's left alot of people "scratching their heads" to what the heck just happened. People's "diversified" farming operations became narrow focused. The business of farming dynamics changed last year. And there are going to be alot of farmers that will have non-profitable businesses. And the pool of farmers will exit the scene and look for jobs "in town" if the scenarios follow the history of the 80's Many farmers in the 80's had family farms paid off. They leveraged "paid off land" for more land. When you use "paid off farms" as collateral you just lost ownership of your land to the bank. The Greed of Farmers and the pride of human nature will bring some of these people to their knees. Some will be innocent victims. The BIG farms will continue to be subsized by the bankers of the Government. The Bank that owns the Government has an interest to control the majority of the Ag sector. They control it with subsidies and their hand outs. Quote "farming loans". That's why this article is disturbing. The Lean don't worry about $4 corn is troubling. The strength of America is the heartland . . . . .I got a front row seat for this drama as it unfolds. i pray that real people's lives aren't destroyed because of a few
Unknown
2/6/2014 | 4:03 PM CST
The sad reality will be like the 80's, big right downs for the farms that are to big to fail. The people that own a lot a land the next generation inherits all of the wealth, most of the time tax free. We now live in a time of entitlements, and one is the next generation thinking that they don't have to pay their dues. We are at a time of historical lows in inheritance taxes yet have a country greatly in debt. This is clearly turning this country into a country of the few privileged running things, locking people in the lower class unable to obtain the American dream. Clearly it isn't a level playing field, but there has to be some equality.
Raymond Simpkins
2/6/2014 | 12:13 PM CST
Marcia Not sure how to take your last paragraph, Sounds like a slam againts small farmers. And I too don't know why farm magazines don't write about the smart farmers. It's always the big blow.We farm 1000 acres with no debt and I will not grow a crop at breakeven levels. So what are those guys going to do in a couple of years when corn is less than 2.50?(farm for the hell of it)Those guys are the ones am I talking about BIG BLOWS.10,000-12,000 dollar an acre ground has to be paid for somehow.Good luck to the guy who thinks he can flex his rent with his landlords. There is always somone wiiling to pay what the landowner wants. Let's here some stories from, as you say conservative farmers!! After all we will be the ones left to farm.
John W
2/6/2014 | 9:59 AM CST
Is it still going to pay to plow up pasture under the farm bill? I have watched a couple of square miles of land that used to be pasture. It was plowed up about three years ago. I have an untrained eye for crops, but I would say the field has never produced a crop. The owner had to know it would not produce a crop, but I am guessing it was profitable because of crop insurance. Sure hope that practice slows down. The pasture used to produce lot pheasants and ducks. Now it is just a big plowed field with alkalai circles all over it.
Pedro Sanchez
2/6/2014 | 8:54 AM CST
Marcia, when you are at this meeting, are these farmers telling you what you want to hear or are they actually showing you their balance sheets and cash flows? I think the reality of the situation is $4 corn doesn't pencil out in most operations, especially on rented land. Yes the farmers who own a large chunk of their ground will be fine, but from my experience, the "BTO's" renting the majority of their land will be penciling in red this year and going forward till expenses correct themselves. I guess maybe this phenonamon is only in MN.
W Kuster
2/6/2014 | 8:16 AM CST
When you do not have any land costs other than real estate taxes it should be obvious that the government is in most cases still guaranteeing these individuals a profit with federal crop insurance. And these federal crop insurance schemes are supposed to help the poorer farmers compete by giving the most competitive a continual guarantee of profitability? Government has no business providing anyone with a guarantee of profitability.