Cash Rents to Drop in 2017

In the farmland market, the adjustment in market value can be a slow process because the value of farmland is not only influenced by current conditions but also by expected future conditions. Initially a sharp downturn in the profitability of crop production may be viewed as a temporary event. While evidence is collected on the likelihood that the future will be a lower profit environment, values hold steady. As buyers adjust their expectations about future profitability, farmland values will begin to decline. 

Table 1. 2015 & 2016 Purdue Crop Guide budgeted net return for 3,000-acre farm and 2017 forecast. 

As with Indiana farmland values, current and expected future profitability in grain production is an important force in the farmland rental market. However, if the cash rent being paid by the operator is too high, this situation can quickly erode the working capital position of the business. As a result, it is important that operators are able to make adjustments in production costs, including cash rent, in a reasonable period. 

The Purdue Crop Guide contribution margin, the margin remaining to pay overhead costs of operator labor, machinery, and cash rent from a corn and soybean rotation, for 2015, 2016, and 2017 are estimated to be $250, $220 and $236 per acre, respectively. Cash rents from the Purdue Farmland Value Survey for average farmland during 2015, and 2016 were $229, and $204 per acre. Subtracting the cash rent from the contribution margin in 2015 and 2016 leaves $21 and $16 per acre to pay for operator labor and machinery overhead. The Purdue Crop Guide estimates operator labor expense to be $45 per acre in 2015 and $44 per acre in 2016. Machinery overhead for a 3,000-acre farm was estimated to be $94 in 2015 and $98 in 2016. Subtracting these expenses from the contribution margin results in a negative net return of $118 in 2015 and $126 in 2016. These budgets indicate that there is not enough income to cover total production and overhead costs. 

These losses have motivated operators to attempt to lower the cost of producing crops. Declines in the price of fertilizer and fuel prices have helped. Reducing the use of seed traits, lowering seeding rates, cutting back on fertilizer rates, reducing the application of crop protection products, reducing family living expenses and working to reduce cash rents are all things being tried to lower the per bushel cost of corn and soybean production. 

These losses also indicate more work needs to be done to lower total production costs. It is expected that on average cash rents in 2017 are likely to decline by 5% to 10%. If these cost and return projections become reality, the 2017 net return loss will be $39 – $49 per acre less. It would also be the second year of a 5% or larger reduction in cash rent; the first time since the 1980s to have cash rent reductions this large in consecutive years. 

The budget numbers presented do not represent a specific farm. In the current environment it is important to know what numbers represent your situation in order to establish an equable cash rent. In the current economic environment, contribution margins (revenues minus direct costs) are small. If cash rent is less than the contribution margin, the difference that remains helps to pay overhead costs. The loss minimization strategy would be to continue farming the farm. On the other hand, if the cash rent is more than the contribution margin, there is no positive contribution associated with renting the land. In this case, the loss minimization strategy is to stop renting the farm.