Generally, farms with more of their acres cash rented at higher cash rent levels will face more downside income risk compared to farms with fewer acres cash rented at lower cash rent levels. As a result, farms with high cash rent levels could face large losses in some future year. This is illustrated by projecting 2013 incomes for farms with different rental situations.

Farm Situation

The following farm situation was used in a previous post to project 2013 incomes. The situation is designed to be representative of commercial grain farms in Illinois:

Income Scenarios

Incomes are projected under three scenarios:

Rental Scenarios

Incomes are generated under four different cash rental situations:

Projected Incomes

The base case with 30% of its acres share rented has projected net farm income of $291,000 (see Table 1). The $291,000 income would be above the average for the years from 2007 through 2011. The worst-case income is $43,000 and the income at long-run prices of $4.50 corn and $10.50 soybeans is $91,000.

Shifting all share rent acres to cash rent acres while maintaining a $300/acre cash rent results in $304,000 net income, slightly above the $291,000 income for the base case (see Table 1). Higher income occurs because share rent landlords receive more than $300/acre at a $5.80 corn price and $10.40 soybean price. The worst-case income declines from $43,000 under the base case to $13,000 under the all cash rent scenario, illustrating that share rent arrangements reduce downside risk to farms.

Increasing cash rents reduces incomes. When all rented farmland is cash rented, projected incomes is $304,000 for a $300/acre cash rent, $250,000 for a $350/acre cash rent and $196,000 for a $400/acre cash rent (see Table 1). Worst-case incomes are $13,000 for a $300/acre cash rent, -$41,000 for a $350/acre cash rent and -95,000 for a $400/acre cash rent. Note that it is not possible to guarantee a positive net income with high cash rents and RP insurance at an 80% coverage level. Projected long-run incomes are $69,000 for a $300/acre cash rent, $15,000 for a $350/acre cash rent and -$49,000 for a $400/acre cash rent.

Summary and Observations

Given current estimates of 2013 cash prices, projected incomes for all rental scenarios will be relatively high, suggesting that 2013 could be a good income year. Worst-case incomes are considerably lower than projected incomes. Note that farms with high percentage of acres cash rented at high cash rent levels cannot assure themselves of positive incomes using 80% RP crop insurance. In some year in the future, these results suggest that farms with high amounts of cash rent may face large losses.

Under long-run prices, projected incomes are low or negative given high cash rent levels and a high percentage of farmland cash rented. If prices return to the lower, long-run levels, there will likely be downward pressure place on cash rents so as to avoid negative farm incomes.

Read the article at farmdocDaily.