Minding Ag's Business

Renters at Risk

Costs of production have never reset since the price collapse two years ago.Season average corn prices for 2015 are running nearly half the 2013 level.

Messages I'm hearing from experts run like this: Cash renters losses really began in earnest in 2014, now 2015 will magnify them. Futures prices tell us 2016 looks disastrous unless they do something to manage average costs--or something unexpected turns grain markets around.

Midwest cash grain producers who rent high percentages of the land they farm are the most at-risk as commodity prices reset. We've seen a few bankruptcies already and lenders expect a few more failures before the cycle ends. Some 10,000-acre farms can survive as downsized 7,000 to 5,000-acre farms, they say, but those with small land bases may have difficulty surviving the abrupt commodity price drop if they have a high "burn rate" on working capital.

In fact, economists at Purdue University and University of Illinois differentiate between the 1980s credit crisis and 2015 this way: In the 1980s, highly leverage operators with no caps on their variable interest rate loans were the most at-risk farmers. Today, the at-risk operators tend to be those growers with a high percentage of fixed cash rent who (1) carry the highest cost of production and (2) will likely burn through their cash reserves first. Without adequate working capital, they will run into debt servicing problems, not solvency problems, Purdue's Mike Boehlje stressed in a recent DTN interview for our "Cash Rent Reset" series (see this week's Best of DTN newsletter www.dtnpf.com/dtnag/best-of-dtnpf). A post September 1 by University of Illinois economist Gary Schnitkey on farmdoc daily makes a similar point http://goo.gl/…

Southwestern Minnesota's Farm Business Farm Management Association most recent farm records help illustrate the problem. Of the crop farms in its database, corn cost of production on owned farmland varied from $4.43/bu. for the low 20% profit group to $2.48/bu. for the high profit group--a spread of more than $2/bu. But switch gears to the renters, and production costs ranged from a low of $3.25 in the high profit 20% to a $5.03/bu. for the lowest profit 20% group. The highest cost operators paid an average of $288/acre for rents, their biggest expense.

On average, SW Minnesota corn cash renters LOST $80.35/acre last season versus an average PROFIT of $64.78/acre on those with owned land. Many of those with losses already dipped into their working capital--ie. a farmer's savings account of cash and inventories--to pay their debts in 2015.

In recent months, Schnitkey has been pleading the case that average Illinois cash renters will need a $100 per acre reduction in 2016 budgets just to break even at $4 corn and $9.25 soybeans. At current futures prices for 2016 crops, the tab goes up to about $150, he says, assuming some extra government payments kick in.

How likely are cuts of that magnitude in any single year? Just $100/acre represents an 11% decrease from $872 of total costs using Illinois budgets. A yearly decrease of 11% has not occurred since 1972, Schnitkey admits. To achieve anything near what needs to be done, operators will need to spare nothing--including scrutinizing fertilizer costs, seed and family budgets. Shaving anything that cuts yield is self-destructive, but Schnitkey says some farm managers are allowing operators to forgo P and K applications if their farms are above maintenance levels this year. Some growers are switching to variable rate technology. Some are watching prices carefully: DTN's weekly retailer surveys show national average prices for urea down 14% and UAN products down 5% to 7% vs. a year ago.

In tight times, the advantage will go back to land owners who won't be under near as much pressure to cull costs. Is it time to admit that growth through land ownership might have been a better business model than super-sizing cash rentals?

Those conservative operators who plowed money back into real estate the past decade have locked in their land costs at 200-year lows in interest rates. They have earned amazing capital gains--on the order of 300% in Iowa since 2005--not including the "dividends" from operating profits.

Today, if you are pinched financially, you can mortgage some of that land equity to bring cash back into the operation. Borrowing against used farm equipment is much more challenging: An Arkansas farmer tells me he can't use equipment as collateral unless he owns 50% of more of it. Many Midwest grain operators figured their equipment "depreciated" about 25% to 30% in 2014, a hit to their net worth.

Farmland owner-operators will live to fight another day in agriculture; guys who are all-cash rent-all-the-time maybe not. Their future mostly depends on the willingness of their landowners to offer some sizable concessions on cash rents for 2016 or agree to share some of the market risks.

Landowners aren't happy about the arrangement. In Ohio, Indiana and Nebraska, many complain their property taxes have as much as doubled in the last year, maybe taking an extra $20 to $30/acre out of their revenues. They aren't in a mood for rent concessions. But as Iowa realtor Steve Bruere points out, "Nobody comes out ahead putting their operator out of business."

For alerts on DTN farm business coverage, follow me on Twitter@MarciaZTaylor

Comments

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Raymond Simpkins
9/10/2015 | 6:46 AM CDT
Freeport, The money you have let does not cover the rest of input cost. 1.72 times 160 bu.
Freeport IL
9/9/2015 | 5:18 PM CDT
The story of the times is "Cut Land Cost". We would like to change that to cut fixed cash cost on a bushels per acre basis. The challenge with just cutting cost by the acre may come back and hurt use. Let's say we have two farms: one with an expected yield of 160 bushels per acre with a rent of $245 and the other a yield expectation of 220 â?“ renting for $320. The rents for both in this environment seems high from the renter's point of view. The 160 bushels/acre is costing us more on a per bushel basis than the other - $1.53 per bushel versus $1.45 ($1.53 = $245/160 and $1.45 = $320/220). When one changes their acres farmed, the installment (equipment) loans are spread over few acres increasing your cost per acre. The same is true when living costs. They are spread over fewer acres so the cost per bushel increases. There will be cases where holding higher priced land than the level desired, maybe cheaper than not farming it and trying to spread other cost over few acres. While negotiating rents lower one may also want to look at the cost per bushel of purchased land. It might be some of the most expense land one operates on a $/per bushel cost basis. Selling land is not what farmers prefer to do. But talk to your lender to see what opportunities the lower debt and extra working capital can do for you. The solution is harder then it appears. One cannot change the size the operation without other major changes without expecting operating cost on a per bushel level to increase. Freeport, IL
Raymond Simpkins
9/3/2015 | 11:20 AM CDT
Agriculture as a whole is in a lot more trouble than anyone is willing to admit. Thanks to the federal government.
andrew mohlman
9/2/2015 | 11:54 PM CDT
If profits don't return than everybody will be in trouble. Other jobs and people won't be needed.all those taxes won't get paid. Doom for who?
Raymond Simpkins
9/2/2015 | 9:01 PM CDT
Operators who bought land in the last 3-4 years are exactly what they said,Locked In. With big payments on ridiculous land prices and falling land values. At least with rent they can drop it and walk away. The operators with large rent payments have nobody to blame but themselves,no one told them to give such high rates. The guys in Iowa you mentioned paying 325.00 an acre are not going to make it with 3.25 corn. If you do own the land outright and someone is willing to give those kinds Notof rents you would be better off renting it out. The Illinois figure of 872.00 an acre inputs takes 260 bu. just to breakeven. How many years in a row can you count on that? Not sure if so-called land owners will be better off because most don't really own.