Cash renters need to weed their land base of subpar land if they hope to get cost of production into alignment, two ag economists caution.
Lack of discipline means producers consistently overpay for lower quality land, both when renting and as land buyers. The phenomenon is not limited to the Midwest but also occurs throughout the Mississippi Delta states, Wells Fargo Chief Agricultural Economist Mike Swanson and Mississippi State University's Byron Parmon stressed in an online webinar this week.
The impact of yield differential on cost of production is pronounced, Swanson said and can't be corrected simply by applying variable fertilizer rates or seed populations as some prescription farming programs recommend. Operators already spend less on variable costs on these high risk fields, but cutting inputs further just risks limiting yields.
"Since 2000, about 28% of Indiana corn yields have gone into landlords pockets," he said. "But averages can lead to misleading situations."
Purdue 2016 budgets show operators don't discount Class 4 land nearly enough to compete with Class 1 quality. Typically they pay $161 per acre for land yielding a low 132 bpa average, versus $269 per acre for land with 198 bpa potential. That's not enough of a discount to equalize the yield penalty: A 3,000-acre operator would have a breakeven of $5.25 per bushel--nearly $1 per bushel more than the $4.36 breakeven on high-yield land, Swanson calculated.
In effect, the rent on that poor quality land would need to fall to $44 per acre (from $161) just to get the operator to breakeven, Swanson said. But that would just barely cover the high-tax state's $40 per acre property taxes, something owners would likely resist.
"Someone needs more than 10 bpa production just to pay the property taxes in Indiana," Swanson said.
The net effect is that Indiana renters are "nowhere near breakeven on high quality land," let alone the poorest quality, Swanson stressed. At current prices and trend yields, they are likely losing about $2 per bu. on lower-yielding land and about 80 cents per bushel on the highest quality land, he said.
In the Delta--including parts of Mississippi, Louisiana and Arkansas--the break evens for marginal land are "eye opening" said Parmon. Pivot irrigation simply can't keep up with excessive heat demands, so fields there must be precision leveled and gravity-fed furrow irrigation installed. In the Midwest, one of the most important upgrades is tiling to improve drainage.
Those improvements lower operating costs in the long run and greatly reduce operator yield risk, Parmon said. (During more flush times, some Delta tenants offered to install those improvements if owners guaranteed long-term rent agreements, Mississippi farmers tell me. Now they might agree to rent marginal land only if the owner pays for upgrades. And because Delta growers have been under financial stress longer than in the Midwest, it's not uncommon to find rented fields mined of phosphorus and potash when there's tenant turnover now, another reason new renters should be leery of marginal properties.)
The impetus for lowering cash rent costs is that renters have lost substantial amounts of equity since 2014. New University of Illinois budget projections factor in $3.50 bu. corn and $9.50 bu. soybeans with no ARC payment for either crop. That means growers must prepare for even lower revenue in 2017 than 2016, University of Illinois Economist Gary Schnitkey tells me.
Cash rents will be under far more pressure to adjust in 2017 than in recent memory, Wells Fargo's Swanson agreed. "A lot of above-average, multi-year rents negotiated in 2012 to 2014 are expiring now, he points out. "This is the last hoorah for them." So next year, he's expecting average rents to come down substantially.
Follow Marcia Taylor on Twitter @MarciaZTaylor
© Copyright 2016 DTN/The Progressive Farmer. All rights reserved.