There used to be a game played in grade school that went something like this. Two boys would stand face to face out on the playground and stare each other down. The one that blinked first lost. In hindsight the stakes weren’t large, but at the time it seemed like serious business with bragging rights on the line.
Today, there’s a different version of this game being played out in farm country. It’s more intense and with potentially serious consequences. After several years of historically high grain markets, cash rents were bid up to $250 to $350 per acre on the more productive ground. However, in the last two years grain markets collapsed. Futures markets are now predicting corn prices near or just under $4 per bushel for corn and $9 per bushel for soybeans for 2016 to 2018 fall contracts.
Something must give, but the question is what? And what happens if it doesn’t give?
To give you a better understanding of how things got to this point, here is basic information on prices, costs of production and expected returns.
This information was originally prepared for western Kentucky, because I’m an Extension economist at the University of Kentucky. However, this information should apply across most of the Corn Belt.
Profitability given expected prices is headed south.
Table 1 shows projected costs for 175 bushel per acre corn and 51.5 bushel per acre soybean land. This cost structure uses anhydrous for nitrogen and a 25 mile, one-way trucking distance. Other major assumptions include $2.00 per gallon for diesel fuel, maintenance levels of phosphorus and potassium, and a $10 per planted acre for ARC payments from USDA. Costs include machinery depreciation, overhead and a base labor wage as if you hired it done. For machinery, depreciation and overhead is estimated at $52 per acre- a $15 per acre increase over pre-2010 levels.
Expected gross revenue will be lower.
Table 2 shows an example of expected gross return using cash prices of $3.75 per bushel for corn and $8.75 per bushel for soybeans for a 2016 to 2018 average. This example arrives at gross revenues, or total income per acre counting government payments, of $666 per acre for corn and $461 per acre for soybeans. Government payment is from the ARC program.
The result will be lower gross returns
Gross return takes total projected revenue and subtracts out all costs except land rent. Non-cash costs such as family labor, depreciation and overhead are included. Assuming $3.75 per bushel corn and $8.75 per bushel soybeans, the gross return would be $190 per acre for corn, and $170 per acre for soybeans, or an average of $180 per acre for a 50-50 rotation. The difference between gross return and land rent is return to management.
Management returns can be negative
With $280 per acre land rent, this farm would be projected to have a negative return to management of $100 per acre. The producer would lose $100 per acre over all costs. With a $200 per acre land rent, this farm would be projected to have a negative return to management of $20 per acre. It’s a loss, but a much smaller loss.
Example on less productive corn land
Table 3 shows this same analysis but with 150 bushel per acre corn and 45.5 bushel per acre soybeans. Gross return that includes all costs except land rent would be $114 per acre for corn and $122 per acre for soybeans, or $118 per acre for a 50-50 rotation. Even with lower cash rent of $200 per acre, this farm would lose $82 per acre over all costs. A land rent of $118 per acre would be breaking even, with no return to management.
Explore ‘reasonable cash rent’ term
Cash rents that may have been reasonable with $5 to $6 per bushel corn would be expected to lose considerable money with corn under $4 per bushel, and soybeans under $9 per bushel. That is evident in these examples. The typical rental length in many areas is probably three years. So probably about half of rental agreements would have come up for renewal since corn prices were at or below $4 per bushel in late summer of 2014. However, rents don’t seem to have come down significantly. Reports are that the highest rents, around $300 per acre, have dropped $20 to $50 per acre. The majority of cash rents haven’t changed much.
Understand why rents haven’t come down
The answer can be found in the ‘Blinking Game.’ Most grain farmers don’t want to give up control of land and are willing to ride out at least a year or two at a loss to keep it. They’re hoping other farmers will blink first- walk away from high rent farms. If that happens and rents start coming down, they can renegotiate at an appropriate level.
Many farmers accumulated significantly more machinery capacity over the boom years, often trying to reduce taxes. Those farmers desire to farm more land, not less, to pay for this increased capacity. The end result in many areas with intense competition is that if you walk away from a lease you’re paying $250 per acre on that you can only afford to pay $150 per acre on long-term, there will be another farmer willing to pick that ground up at the original rent, or something close to it.
- Halich is an Associate Extension Professor in Farm management Economics at the University of Kentucky. He’s well-known for his ability to help farmers design break-even scenarios for adding various pieces of new technology. Reach him at [email protected] or call: 859-257-8841.