Reducing Illinois Cash Rents Imperative
An ag economist on the University of Illinois campus is continuing his calls for farmers and landowners to lower cash rents.
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Negative Returns & Down Pressure on Cash Rents
Original Article
Todd Gleason talks with University of Illinois ag economist Gary Schnitkey about cash rents. As it stands today farmers on highly productive land in central Illinois are likely to loose about $70 for every cash rented acre planted to corn.
by Gary Schnitkey
Univeristy of Illinois
Surveys conducted by the Chicago Fed and the Illinois Society of Professional Farm Managers and Rural Appraisers indicate that 2015 cash rents have decreased between $20 and $25 per acre from 2014 levels. If these reductions occur, the majority of farmers still will have negative returns from cash rent farmland given current corn and soybean price levels. At a $3.75 per bushel corn price and a $9.50 soybean price, cash rents need to decrease from 2014 averages by around $70 per acre before farmer return is zero. Even given mid-$4.00 prices for corn, farmers will not have positive returns given cash rents at 2014 averages.
Operator and Land Returns
Table 1 shows estimates of 2015 operator and land returns. Operator and land returns represent the returns that can be split between the landowner and farmer. If operator and land returns are $300 per acre and cash rent is $250 per acre, the farmer will have a $50 per acre return. Operator and land returns are based on revenues, yields, and costs shown in the 2015 Crop Budgets and are averaged over the corn and soybean crops.
Operator and land returns are given for four different regions: Central Illinois with high-productivity farmland (Central-High), Northern Illinois (North), Central Illinois with low productivity farmland (Central-Low) and Southern (South) Illinois. In Table 1, regions are arrayed from the highest yielding on the left (Central-High) to the lowest yield region on the right (South). Operator and land returns decrease with lower yields. Even though these are Illinois specific regions, returns shown in Table 1 are generalizable to a wider geographical area.
There are five price scenarios in Table 1. The first is a $3.75 per bushel corn price and $9.50 per bushel soybean price, slightly above current bids for delivery of 2015 grain. These prices are used to determine crop revenue given the expected yields for each region. For example, the expected yields for the Central-High region are 198 bushels per acre for corn and 57 bushels for soybeans (see Table 1). Gross revenue also include ARC/PLC and crop insurance payments, both of which decrease with higher prices.
At a $3.75 corn price and a $9.50 soybean price, the operator and land return for the Central-High region is $226 per acre (see Table 1). The average cash rent in 2014 is $293 per acre, implying a farmer loss of $67 per acre ($226 operator and land return - $293 cash rent). Other regions have similar levels of loss: -$77 per acre for the North region ($188 operator and land return - $265 cash rent), -$73 in the Central-Low region ($170 operator and land return - $243 cash rent), and -$71 in the South region ($92 operator and land return - $163 cash rent). Note that $20 to $25 per acre decreases in 2015 cash rents do not lead to positive farmer returns given that cash rents started at average levels.
Longer-Run Price Levels
Current price levels may be below long-run prices. Previous analyses (farmdoc daily, February 27, 2013) suggest that longer run prices may be around $4.60 per bushel for corn and $10.60 for soybeans. Obviously these higher prices will result in higher operator and land returns, as is illustrated in Table 1. Take the $4.50 corn price and $11.00 soybean price. These prices give $298 per acre of operator and land return in the Central-High region. Note that the $298 operator and land return is near the 2014 cash rent of $293 per acre. At this price level, the operator and land returns for all regions are near the average 2014 cash rent levels. The nearness suggests that cash rents would need to decline if long-run prices are in the $4.50 per bushel range for corn and $11.00 per bushel range for soybeans. In the past several years, increases in cash rents likely overshot levels supported by long-run prices.
Note that the above analysis is based on non-land costs remaining at current levels of roughly $600 per acre for corn and $370 per acre for soybeans. These cost levels are at historically high levels (farmdoc daily, March 29, 2011). Decreases in fertilizer, seed, and chemical costs could reduce the need for decreases in cash rents.
Setting 2016 Cash Rents
Table 1 can be used to gain a feel for the relative size of downward pressures placed on cash rents in 2016. Given that costs do not change, operator and land returns shown in Table 1 will be accurate for 2016.
Expected 2016 commodity prices during the fall of 2015 will have a bearing on pressures place on cash rents. If corn and soybean prices respectively remain near $3.75 and $9.50 per bushel, cash rents will need to decrease by around $70 per acre from 2014 average levels before farmer returns are near zero. Obviously larger decreases would be needed before farmer returns become positive. Pressures will be reduced with higher price expectations. Take the price scenario having respective corn and soybeans prices of $4.25 and $10.50 per bushel. Under this scenario, rents would have to be decreased by $19 to $37 per acre, depending on region, from 2014 average levels to have farmer returns at $0 per acre. For farmers to have positive expected returns without cash rent of non-land costs, corn and soybean prices respectively need to be in the high-$4.00 and mid-$11.00 range.
Summary
Given current price levels, avenge cash rents levels need to decrease by over $70 per acre for farmers to have returns near zero. Continued pressures on cash rents will occur in 2016 unless significant increases in prices occur from their current levels. Unless non-land costs decrease, prices must be in the high $4.00 range before downward pressures are not placed on average cash rents.
Todd Gleason talks with University of Illinois ag economist Gary Schnitkey about cash rents. As it stands today farmers on highly productive land in central Illinois are likely to loose about $70 for every cash rented acre planted to corn.
by Gary Schnitkey
Univeristy of Illinois
Surveys conducted by the Chicago Fed and the Illinois Society of Professional Farm Managers and Rural Appraisers indicate that 2015 cash rents have decreased between $20 and $25 per acre from 2014 levels. If these reductions occur, the majority of farmers still will have negative returns from cash rent farmland given current corn and soybean price levels. At a $3.75 per bushel corn price and a $9.50 soybean price, cash rents need to decrease from 2014 averages by around $70 per acre before farmer return is zero. Even given mid-$4.00 prices for corn, farmers will not have positive returns given cash rents at 2014 averages.
Operator and Land Returns
Table 1 shows estimates of 2015 operator and land returns. Operator and land returns represent the returns that can be split between the landowner and farmer. If operator and land returns are $300 per acre and cash rent is $250 per acre, the farmer will have a $50 per acre return. Operator and land returns are based on revenues, yields, and costs shown in the 2015 Crop Budgets and are averaged over the corn and soybean crops.
Operator and land returns are given for four different regions: Central Illinois with high-productivity farmland (Central-High), Northern Illinois (North), Central Illinois with low productivity farmland (Central-Low) and Southern (South) Illinois. In Table 1, regions are arrayed from the highest yielding on the left (Central-High) to the lowest yield region on the right (South). Operator and land returns decrease with lower yields. Even though these are Illinois specific regions, returns shown in Table 1 are generalizable to a wider geographical area.
There are five price scenarios in Table 1. The first is a $3.75 per bushel corn price and $9.50 per bushel soybean price, slightly above current bids for delivery of 2015 grain. These prices are used to determine crop revenue given the expected yields for each region. For example, the expected yields for the Central-High region are 198 bushels per acre for corn and 57 bushels for soybeans (see Table 1). Gross revenue also include ARC/PLC and crop insurance payments, both of which decrease with higher prices.
At a $3.75 corn price and a $9.50 soybean price, the operator and land return for the Central-High region is $226 per acre (see Table 1). The average cash rent in 2014 is $293 per acre, implying a farmer loss of $67 per acre ($226 operator and land return - $293 cash rent). Other regions have similar levels of loss: -$77 per acre for the North region ($188 operator and land return - $265 cash rent), -$73 in the Central-Low region ($170 operator and land return - $243 cash rent), and -$71 in the South region ($92 operator and land return - $163 cash rent). Note that $20 to $25 per acre decreases in 2015 cash rents do not lead to positive farmer returns given that cash rents started at average levels.
Longer-Run Price Levels
Current price levels may be below long-run prices. Previous analyses (farmdoc daily, February 27, 2013) suggest that longer run prices may be around $4.60 per bushel for corn and $10.60 for soybeans. Obviously these higher prices will result in higher operator and land returns, as is illustrated in Table 1. Take the $4.50 corn price and $11.00 soybean price. These prices give $298 per acre of operator and land return in the Central-High region. Note that the $298 operator and land return is near the 2014 cash rent of $293 per acre. At this price level, the operator and land returns for all regions are near the average 2014 cash rent levels. The nearness suggests that cash rents would need to decline if long-run prices are in the $4.50 per bushel range for corn and $11.00 per bushel range for soybeans. In the past several years, increases in cash rents likely overshot levels supported by long-run prices.
Note that the above analysis is based on non-land costs remaining at current levels of roughly $600 per acre for corn and $370 per acre for soybeans. These cost levels are at historically high levels (farmdoc daily, March 29, 2011). Decreases in fertilizer, seed, and chemical costs could reduce the need for decreases in cash rents.
Setting 2016 Cash Rents
Table 1 can be used to gain a feel for the relative size of downward pressures placed on cash rents in 2016. Given that costs do not change, operator and land returns shown in Table 1 will be accurate for 2016.
Expected 2016 commodity prices during the fall of 2015 will have a bearing on pressures place on cash rents. If corn and soybean prices respectively remain near $3.75 and $9.50 per bushel, cash rents will need to decrease by around $70 per acre from 2014 average levels before farmer returns are near zero. Obviously larger decreases would be needed before farmer returns become positive. Pressures will be reduced with higher price expectations. Take the price scenario having respective corn and soybeans prices of $4.25 and $10.50 per bushel. Under this scenario, rents would have to be decreased by $19 to $37 per acre, depending on region, from 2014 average levels to have farmer returns at $0 per acre. For farmers to have positive expected returns without cash rent of non-land costs, corn and soybean prices respectively need to be in the high-$4.00 and mid-$11.00 range.
Summary
Given current price levels, avenge cash rents levels need to decrease by over $70 per acre for farmers to have returns near zero. Continued pressures on cash rents will occur in 2016 unless significant increases in prices occur from their current levels. Unless non-land costs decrease, prices must be in the high $4.00 range before downward pressures are not placed on average cash rents.
Cost of Diesel & the Farm
The price of diesel has dropped and this should be helpful to U.S. farmers.
U.S. farmers struggling to find ways to cut cost will find the price of diesel fuel somewhat comforting. It is one of their larger input costs for the production of a row crops like corn or soybeans. This year that fuel cost will be sharply lower says University of Illinois Ag Economist Gary Schnitkey.
U.S. farmers struggling to find ways to cut cost will find the price of diesel fuel somewhat comforting. It is one of their larger input costs for the production of a row crops like corn or soybeans. This year that fuel cost will be sharply lower says University of Illinois Ag Economist Gary Schnitkey.
Quote Summary - Since 2011 on through 2014 diesel fuel prices have average about $3.50 per gallon. Today’s cost is about a 36% decline. It is a significant decline in the cost of diesel fuel from the last four years.Here’s how that costs translates directly to the farm. Last year fuel cost Illinois farmers, on average, $24 per acre of corn production. A 36% drop puts that estimated cost this year at $15 per acre. It’s a nine dollar savings, but certainly not enough to really ease the coming income woes of the American corn farmer comments Schnitkey.
Quote Summary - The total cost to raise an acre of corn is about $600. So, the fuel savings is a relatively small portion of the total cost of producing corn, and for that matter soybeans in the state.Schnitkey thinks producers should certainly consider taking advantage of the diesel fuel prices today. The other two items of note related to energy costs concern drying corn in the fall and nitrogen fertilizer. The ag economist thinks drying costs should be much lower this fall. As for the cost of nitrogen fertilizer - and this would be for next year - well he says…
Quote Summary - Patients, relative to nitrogen fertilizer and buying it, might be a good thing. Because maybe someday that will come down.The cost of nitrogen fertilizer this year is actually higher than it was last year. Its primary creation cost is for natural gas.
It is True – 20% of the Farms Produce Most of the Value
The 2012 Census of Agriculture hold many unique facts. Researchers at the University of Illinois have been digging through the numbers to find some plumbs. Todd Gleason reports it seems an old adage is borne out by the figures.
There were about 75 thousand farms in Illinois when the 2012 Census of Agriculture was taken by the United Stated Department of Agriculture. The census, by two different measures – acreage operated & value of production – suggests the majority of Illinois farms are small by either categorization. However, there are two interesting facts that flow with these categorizations. The smaller the farm the more likely it is to produce livestock of less total value, and the larger the farm the more likely it is to produce crops – mostly grains and oilseeds - of much greater value.
The Census of Agriculture defines a farm as any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the reference year. The Census classifies each farm's production specialization based on the North American Industry Classification System (NAICS). A "Livestock" farm is
There were about 75 thousand farms in Illinois when the 2012 Census of Agriculture was taken by the United Stated Department of Agriculture. The census, by two different measures – acreage operated & value of production – suggests the majority of Illinois farms are small by either categorization. However, there are two interesting facts that flow with these categorizations. The smaller the farm the more likely it is to produce livestock of less total value, and the larger the farm the more likely it is to produce crops – mostly grains and oilseeds - of much greater value.
The Census of Agriculture defines a farm as any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the reference year. The Census classifies each farm's production specialization based on the North American Industry Classification System (NAICS). A "Livestock" farm is