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Risky rent

The farmland rental tales of woe are starting to surface. Usually the story is that a farm family loses a rental property to another farmer willing to risk a higher rent.

But after reading a Farm Business Management report on cash rents from the University of Illinois, it is difficult to determine which of those farmers has a real tale of woe. Higher commodity prices coupled with higher production costs have created a risky rental climate. The safety net of government payments and crop insurance doesn't kick in until prices and revenues drop a long way compared to previous years.

Gary Schnitkey, university economist, encourages growers to consider these added risks when making new rental agreements. “Much larger farmer margins will need to be in place for similar risk levels as compared to the 2001 to 2005 period,” he reports. For example, he says, farmers' margins should double for land rented in central Illinois.

He bases his conclusions on the recent cash rent report from Illinois. The report compares actual revenues and costs from 2001 to 2005 to projected 2008 figures for highly productive farmland in central Illinois. From 2001 to 2005, gross revenue for corn priced at $2.22/bu. was $457/acre and soybeans priced at $5.89/bu. was $352/acre. The gross revenue projected for 2008 is $650/acre for corn and $469/acre for soybeans. A $3.50/bu. corn price and $8.50/bu. soybean price were used.

Growers need to temper their excitement over bigger revenues with the knowledge that production costs are greater, too. Non-land costs for corn production are estimated at $314/acre for 2008, which is $57/acre higher than during the period from 2001 to 2005. Soybean non-land costs are projected at $199/acre compared to $171/acre in the 2001 to 2005 period.

From 2001 to 2005, a farm in this area of Illinois returned an average of $199/acre on an even corn-soybean rotation. A farmer paying $150/acre cash rent earned $49/acre. The report projects a $314/acre return for an even corn-soybean rotation in 2008. For the farmer earning $49/acre, the rent would be $265/acre.

Will a return of $49/acre be enough in 2008? Not in the face of increased risk, according to the report. The odds of losing money at a $49/acre return is once every three years compared to once in 10 years for the 2001 to 2005 period. The triple whammy of price volatility, loss of government loan deficiency payments, and much greater revenue losses required for crop insurance payments create poorer odds for success.

The solution? Farmers need to negotiate more flexible rental agreements that vary payments based on price and yield. Schnitkey says. These may include share rent leases, share with supplemental rent leases, and flexible cash leases. All will help improve the odds of a good year.

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