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Start cash rent negotiations early for 2021

Purdue ag economist believes negotiations may be different this time around.

June 8, 2020

3 Min Read
soybean field
Will CURRENT RENT HOLD? Cash rent always boils down to a case-by-case basis. However, in general, ag economist Michael Langemeier believes low working capital ratios may lead tenants to offer less for 2021. Tom J. Bechman

The sharp decline in crop prices triggered by the COVID-19 pandemic drastically altered projected budgets for 2020. Starting with already meager prices, the pandemic took projected returns to land even lower, from somewhat below the five-year average to well below average by the time crops were planted.

“We don’t see conditions which would lead to major price recovery anytime soon, although it’s a moving target,” says Michael Langemeier, a Purdue University Extension agricultural economist and associate director of the Purdue Center for Commercial Agriculture. “The eastern Corn Belt has enjoyed a good basis for the past few seasons, but now it’s disappeared, too.”

Coupled with low prices, this is a double whammy, he says. Ag economists don’t see basis improving quickly.

When Langemeier runs numbers for a case farm with average land in west-central Indiana, he finds return to land on a 50-50 corn-soybean rotation is under $100 per acre. Average cash rent for 2020 is around $240 per acre. That leaves a projected deficit of nearly $150 per acre.

That doesn’t count COVID-19 or farm program payments. “Even with those, we still expect a shortfall in 2020,” Langemeier says. “It won’t be enough to make up the difference caused by lower-than-expected prices.”

Looking toward 2021, Langemeier doesn’t expect significant improvement in projected budgets in his case farm example. The possibility of large carryout stocks for corn and soybeans from the 2020 marketing year could continue depressing prices.

That’s why he expects considerable pressure on cash rents for 2021.

“We suggest doing your homework and starting early,” he says. “There will likely be intense negotiations this time around.”

Langemeier and fellow Purdue Extension ag economist Jim Mintert first began talking about pressure on cash rents several years ago, when prices dipped and return to land was falling below what people were offering for cash rent. Some cash rents went down. But in general, average cash rent remained fairly steady — more so than the ag economists would have expected.

Working capital factor

Many things influence cash rent, including a tenant’s desire to hold on to land, personal relationships and the willingness of some to farm for less expected return than others. That helps explain why actual cash rent doesn’t always follow economic projections.

However, Langemeier believes there’s a big difference this time. “Working capital on many farms has decreased dramatically over the past five years,” he says. “The average current asset-current liability ratio is about half what it was then.

“Some chose to bid available capital into cash rent to keep control of land before, even if budgets didn’t justify it. People have paid a premium to cash-rent land. Fewer people will have the ability to do so this time. They don’t have assets to spare.”

The center offers a worksheet for cash-rent calculations on its website. Plug in your own expectations on price, expected government payments and crop rotation, and project rents for the next five years.

“We also have information about flexible cash rents available,” Langemeier says. “They typically start with a lower base rent and then compensate the landowner as yield and/or price improves. You may want to consider them this year.”

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