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).

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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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