Posts

Showing posts with the label cash rent

MFP Payments and 2020 Cash Rents


MFP payments have had impacts on land rental rates. Moreover, uncertainty about the continuation of MFP in 2020 presents issues in setting cash rental rates. Given this uncertainty, we present the idea of setting cash rents at appropriate levels given the price and yield environment, likely lower than 2019 cash rent rates, with contingencies for cases in which MFP payments occur. By doing this, base cash rent is set at a level that allows the farmer to generate profits and leaves open the option for both parties to benefit if MFP payments occur in 2020.

by Gary Schniteky, ILLINOIS Extension
link to farmdocDaily article

Market Facilitation Program (MFP) payments have served as a significant source of revenue on grain farms in 2018 and 2019. Without MFP payments, average farmer returns would be negative in 2019, and far below any level since consistent records began in 2000. Without MFP payments, 2020 returns are projected to be negative. It is unknown at this time if MFP payments will occur in 2020, or the potential level of an MFP payment if the program continues. When developing cash rental rates, we suggest lowering cash rent levels if they are at or above averages for a productivity level, and then having the possibility of higher cash rents if MFP payments occur.

Historic Returns to Central Illinois
Figure 1 shows average operator and land return and average cash rent on high-productivity farmland in central Illinois, with historical values representing actual returns from grain farms enrolled in Illinois Farm Business Farm Management (FBFM). Documentation for values shown in Figure 1 is provided in Revenue and Costs for Illinois Grain Crops (click here for download). Historical and projected revenue assumptions also are given in a November 19, 2019 farmdoc daily article. Figure 1 shows returns for farmland given that 50% of the acres are in corn and 50% are in soybeans.



Two lines are shown in Figure 1. The first is operator and land return, representing a return to both the farmer and land owner. Costs for farmland are not included in operator and land return. If farmland is cash rented, the cost to the farmer is cash rent. Figure 1 also shows average cash rent in central Illinois. When operator and land return is above cash rent, a farmer will have a positive cash return on cash rented land. Losses occur when operator and land return is below cash rent.

Between 2006 and 2013, a period in which corn and soybean prices were relatively high, operator and land returns exceeded cash rents by large margins. This period was characterized by higher net incomes (see farmdoc daily, November 19, 2019). Cash rents were rising during this period in response to higher operator and land returns.

Average operator and land returns have been roughly the same as average cash rents since 2013:
  • 2014: Operator and land return was $290 per acre, cash rent was $293 per acre, and farmer return was -$3 per acre.
  • 2015: Operator and land return was $265 per acre, cash rent was $278 per acre, and farmer return was -$13 per acre.
  • 2016: Operator and land return was $291 per acre, cash rent was $273 per acre, and farmer return was $18 per acre.
  • 2017: Operator and land return was $250 per acre, cash rent was $267 per acre, and farmer return was -$17 per acre.
  • 2018: Operator and land return was $355 per acre, cash rent was $274 per acre, and farmer return was $81 per acre.
  • 2019 Projections are for an operator and land return of $273 per acre, cash rent of $274 per acre, and farmer return of -$1 per acre.
Lower returns after 2013 largely occurred because of declines in commodity prices. Returns shown in Figure 1 suggest that cash rents should decline because farmers need to obtain a positive return for the risks, labor, and management of farming. Likely reasons that cash rents farmers are paying have not declined are 1) financial reserves built during the period of high incomes from 2006 to 2012 are allowing farmers to continue paying high rental rates in hopes that higher commodity prices in the future will make those rates profitable (farmdoc daily, October 4, 2016 and October 23, 2018), and 2) positive returns from owned and share rented farmland are used to subsidize cash rent farmland (farmdoc daily, August 22, 2017). Trade disputes, and other factors such as African Swine Fever in China, have considerably diminished chances of higher prices in the near future.

Impacts of MFP payments
In 2018, trade disputes between the U.S. and other countries began impacting agriculture, with the tariff battle between China and the U.S. receiving a great deal of attention. Soybean prices declined throughout the year as the trade dispute continued. On central Illinois farms, prices averaged $8.85 per bushel for soybeans produced in 2018, down from the $9.81 average from 2013–2018.

Although soybean prices were down, returns were positive for central Illinois farmers, at the highest level since 2013 (see Figure 1). In 2018, operator and land return exceed cash rent by $81 per acre. Both exceptionally high yields and MFP payments contributed to this higher return. In 2018, MFP payments accounted for $62 per acre of return, with most of that coming from soybean acres (see farmdoc daily, November 19, 2019). Without the MFP payments, farmer return in 2018 would have been $19 per acre, in the range of returns in other years since 2013.

In 2019, farmer return is projected at -$1 per acre. Returns are down in 2019 because of much lower yields. MFP payments have a large, positive impact on returns. For 2019, MFP payments for central Illinois grain farms are estimated at $82 per acre, up by $20 from average 2018 levels (see farmdoc daily July 30, 2019 for a list of payments by county). This $82 level assumes that all three tranches of MFP payments are paid. Two tranches totaling three quarters of the payment amount have been paid.

The third tranche, if confirmed, would be distributed in early 2020 with the remaining quarter of the payment. Without a MFP payment, 2019 returns are estimated at -$83 per acre, the lowest farmer return since 2000 (see Figure 1).

Figure 1 also includes projections for 2020. Operator and land return is projected at $232 per acre, cash rent at $270 per acre, and farmer return at -$38 per acre. The 2020 projection is based on a return to trend yields. Exceptional yields like those in 2018 would be needed to get positive returns given prices of $3.90 per bushel for corn and $9.00 for soybeans. However, prices may fall to lower levels if exceptional yields occur. As a result, crop revenue increases alone likely will not lead to higher farmer returns. Positive returns in 2020 may be dependent on some level of support, such as the continuation of the MFP.

MFP Payments in Perspective
In the last two years, MFP payments have been a significant source of revenue on Illinois grain farms. In 2018, MFP payments represented 8 percent of total gross revenue received from corn and soybeans production. In 2019, MFP’s share is presented at 11 percent (see Figure 2).



Government payments have not accounted for that large of a share of gross revenue on Illinois grain farms since the early 2000s. In the early 2000s, government support to farmers through the Agricultural Market Transition Act, Market Loss Adjustment, and marketing loan programs represented a higher share of gross revenue. For example, government payments were 25% of gross revenue in 2000, 23 percent in 2001 (see Figure 2)

Cash Rents Corn and soybean prices fell and were at lower levels in both the early 2000s (beginning in 1998) and since 2018. Those lower prices then led to governments payments. In the early 2000s, those payments were legislated through Congress. The MFP payments come through different authority, with levels determined through a process that is not transparent (see farmdoc daily, November 21, 2019 for more discussion of the MFP program). Also, the levels of MFP payments from one year to the next are not known. For 2019, administrative officials indicated that MFP payments would not occur up to May 2019. In actuality, MFP payments on most farms will be higher in 2019 than in 2018.

Counterfactuals are difficult to prove, but it seems likely that farmers in the early 2000s would have had to make larger adjustments in response to lower commodity prices had government support not existed. In the end, land returns likely would have declined, and cash rents fallen.

Similarly, cash rents likely would have fallen in 2019 as a result of lower commodity prices in 2018 had MFP payments not existed. The extent to which they would have fallen depends on how participants view the permanence of lower soybean prices. If soybean prices will continue below $9.00 for several years, cash rents need to adjust downward if MFP payments do not continue.

2020 Cash Rents
The uncertainty of MFP payments presents an issue for setting 2020 cash rents. If MFP payments do not occur, farmers could face large losses if cash rents levels are set as if MFP payments will occur. On the other hand, MFP payments at the 2018 and 2019 levels could result in good farmer returns, particularly if yields are exceptional. This uncertainty obviously adds to the difficulty in making cash rent decisions for 2020.

As farmers and landowners negotiate rental rates for 2020, several factors should be considered. Cash rental rates have remained relatively flat despite a lower price environment since 2013. The average central Illinois cash rental rate has put farmer returns below break-even in three of the last five years, and likely right at break-even in 2019 including the full MFP payment.

Given the uncertainty about MFP payment, an appropriate approach would be to set a cash rent without the MFP considered in budgeting and allowing for an increase in the rent if the MFP occurs.

As an example, consider 2020 projections. Without an MFP payment, 2020 operator and land return is projected at $232 per acre. This $232 per acre is considerably below the 2018 average rent of $273 per acre. Setting a cash rent at $230 per acre would result in a $2 projected return to the farmer, not a desirable return, but better than a loss that would result with a cash rent at the $273 average for 2019. The lease could then have a clause that shares the MFP payments 50–50 between the land owner and farmer. If an $82 per acre MFP payment is received — equivalent to the average projected payment for 2019 — the farmer would make an additional payment of $41 to the land owner, resulting in total rent to the land owner of $271 per acre ($230 base cash rent plus $41 payments from the MFP payment), and a $43 return to the farmer ($2 projected return with MFP pulse $41 from MFP).

Several notes about the above lease:
  1. A share-rent arrangement has risk sharing directly built into the lease. As a result, MFP payments already are considered in share-rent arrangements
  2. The above lease is very close to a variable cash lease (see farmdoc daily, September 9, 2015 for a discussion of one-type of variable cash leases. Click here for a lease). Variable cash leases would consider possible higher returns due to higher prices or yields. Inclusion of MFP like payments in variable cash leases seems warranted if base levels are low enough such that farmers do not take large losses at base rent levels.
  3. Base levels need to be set low enough so that farmer risks are reduced. Putting a clause for MFP sharing without lowering cash rents simply shifts returns from farmers to land owners, and adds risk to the farmer.
  4. The 50–50 sharing percent is dependent on having the base level low enough that farmer risks are reduced. Given the current economic environment, base rent levels should be well below cash rent levels. A method for determining average cash rents for different cash rent levels is presented in a November 7, 2017 farmdoc daily article.

Adding the Costs of Conservation to a Farm Lease


Farmers and landowners alike are wanting to try more conservation practices. Todd Gleason reports the timing and amount of nitrogen applications along with the use of cover crops can all be written into a farm lease.

farmdoc farm lease page link

(1) Soil Health and Conservation Addendum

The Soil Health and Conservation Addendum is for a landowner who seeks to reach clear understanding with the farm-tenant about practices on the land under lease. The addendum is a fillable pdf and the parties can negotiate the specific provisions to include in the addendum, memorializing the agreement by selecting the specific provisions. The provisions and fillable pdf are designed to be additive: each selected provision will be incorporated in the lease agreement.
Included among the provisions that can be selected are those for tillage practices and cover crop practices. There are also specific provisions pertaining to other conservation efforts that may be present on the farmland, such as ditches, vegetative buffers, terraces or other erosion control measures. The addendum also includes general options that address soil health and conservation efforts for the farmland. Finally, the addendum provides options for the parties to agree to adjustments in the annual rent based on the provisions for soil health and conservation selected above. All of these are only options and the parties are free to adjust or revise the provisions as they consider best and all are again advised to discuss with legal counsel before completing.


(2) Nutrient Management Addendum

Similarly, the Nutrient Management Addendum is a fillable pdf that provides for selecting basic provisions that can be incorporated into any lease. Among the options are those pertaining to adherence to the Maximum Return to Nitrogen (MRTN) for nutrient application on the land subject to the lease, as well as for requiring specific application practices such as split application. Options also include for soil testing, adoption of nutrient management plans and the application of manure, such as an agreement to avoid application on frozen ground.
This addendum also provides options for the parties to agree to adjustments in the annual rent based on the provisions for soil health and conservation selected above. All of these are only options and the parties are free to adjust or revise the provisions as they consider best and all are again advised to discuss with legal counsel before completing.


(3) Conservation Habitat Addendum

This addendum provides specific options pertaining to wildlife habitat on the farmland that is subject to the underlying lease. This addendum provides for general descriptions of the critical area and options for agreeing to basic maintenance or integrated pest management practices. The addendum also provides space for the parties to agree to any adjustments to the rent due to the conservation habitat on the farmland subject to the lease. Again, these options create or alter legal rights and both the landowner and the farm-tenant are advised to consult with their respective legal counsel before completing the addendum.

2018 Cash Rents were up $5/acre in Illinois


University of Illinois Agricultural Economist Gary Schnitkey discusses the surprise $5 an acre cash rent increase seen in the state wide 2018 survey numbers and how farm economics look going into the 2019 growing season.

by USDA NASS
see the 2018 USDA Land Values Survey

Agricultural Land Values Highlights

The United States farm real estate value, a measurement of the value of all land and buildings on farms, averaged $3,140 per acre for 2018, up $60 per acre (1.9 percent) from 2017 values.


Regional changes in the average value of farm real estate ranged from an 8.3 percent increase in the Southern Plains region to 1.4 percent decrease in the Northern Plains region. The highest farm real estate values were in the Corn Belt region at $6,430 per acre. The Mountain region had the lowest farm real estate value at $1,140 per acre.


The United States cropland value averaged $4,130 per acre, an increase of $40 per acre from the previous year. In the Southern Plains region, the average cropland value increased 4.7 percent from the previous year, while in the Lake region, cropland values decreased by 0.6 percent.
The United States pasture value increased by $40 per acre (3.0 percent) from 2017 values. The Southern Plains region had the highest increase from 2017 at 5.6 percent. The Pacific region remained unchanged at $1,650 per acre.


Cropland value: The value of land used to grow field crops, vegetables, or land harvested for hay. Land that switches back and forth between cropland and pasture should be valued as cropland. Hay land, idle cropland, and cropland enrolled in government conservation programs should be valued as cropland.

Cash Rents and the 2019 Growing Season

Professional farm managers in the state of Illinois have completed a cash rent survey. Todd Gleason reports it is a fairly go indicator of where cash rents in the state can be expected to go. He talked with University of Illinois Agricultural Economist Gary Schnitkey about the results.

Owned & Share Cropped Land Making up Cash Rent Losses

The high price of cash rent for corn ground in Illinois has been a loser over the last three seasons. It looks like that may continue for two more years. Todd Gleason has more on how owned ground, and share cropped acres have been making up the difference.





ifr170825–213
Gary Schnitkey, Agricultural Economist - University of Illinois

Grain Farm Income & Cash Rent Outlook

by Todd E. Gleason



Urbana, Illinois - Wednesday morning September 7, 2016 University of Illinois Extension Agricultural Economist Gary Schnitkey presented a webinar looking forward into 2017. The discussion centered on farm profitability, projected income, and cash rents. You may the watch the webinar. What follows is a summary of the hour long content.





The USDA WASDE monthly average corn price is $4.67 from 2006 to 2016. The price of corn has been below this average since the fall of 2013 & Gary Schnitkey believes it is likely to continue to stay below this average through the 2017/18 crop year.

Each year USDA tracks the average marketing year cash price. This price is updated monthly in the World Agricultural Supply and Demand Estimates report. The average cash price for corn from 1975 to 2005 is $2.33, $5.95 for soybeans. This is a long term national average cash price. The USDA projected estimates for this marketing year (2016/17) are currently $3.15 and $9.10. The USDA estimate for the 2015 crops is $3.60 and $9.05. This last set can be used to compute expected ARC County payments to be delivered this fall.







Here is a [link](http://farmdoc.illinois.edu/fasttools/index.asp) to the FarmDoc Fast Tools web page from which you may download an Excel spreadsheet to project ARC & PLC payments.

The following tables detail gross revenue per acre for highly productive central Illinois farmland. These are actual, as derived from the Illinois Farm Business Farm Management records, and projected revenues.







op

Operator and land returns have been declining for both corn and soybeans for several years. However, returns from soybeans have been out performing corn since 2013. Schnitkey predicts this will continue through 2017. It would be the fifth year of higher returns for soybeans than corn. Raising corn on cash rented farmland has been a loser since 2014.

Total income on all Illinois corn and soybean farm (all types of owned & cash rented combined) for 2016 projects a breakeven income year.




Schnitkey says farmers will face three key decision making factors as they consider cash renting farmland for 2017, and that it might be better to give up some of the land based on these considerations.




Across the board the University of Illinois agricultural economist says farmers might need to rethink crop rotations. Soybeans have proved better for several years, and it may be time to adjust to this reality. This or it needs to get cheaper to plant corn. Back in 2000 it costs $63 less to sow and harvest an acre of soybeans. This year the difference was more than $200 an acre of non-land costs in favor of soybeans over corn.



Last week the professional farm managers in Illinois suggested they'd be lowering cash rents by about $20 next year (ISPFMRA Survey). Gary Schnitkey's number is a more conservative $17 an acre based on the fact not all land is professionally managed. Neither of these would be enough to make a cash rented farm break even given $3.50 corn and $9.00 soybeans (2017 | by expected corn yield across Illinois).



So what's the impact on the price of farmland? Well, says Schnitkey, if interest rates stay low the price of farmland will drop by approximately the same percentage change as the cash rent drops. Because cash rent changes very slowly, this is good news for farmland owners, bankers, and producer owners.





Each Tuesday Gary Schnitkey posts a new article to the FarmDocDaily website. Periodically he and the other agricultural economist at the University of Illinois hosts webinars. You may register for upcoming webinars and watch those that have already concluded on this page.


Low Returns, Crop Prices Keeping Pressure on Farmland Values



(Boone, IA, August 31, 2016) – Illinois farmland values continued their pullback around the state during the first half of 2016 as prices retraced between an estimated 3.3 percent and 7 percent. Continued low net returns and softening commodity prices are cited as the primary cause of the decrease. This is according to the Mid-Year “Snapshot Survey” information gathered by the Illinois Society of Professional Farm Managers and Rural Appraisers as well as the Illinois Farm and Land Chapter of the REALTORS® Land Institute (RLI). The data analysis is provided by Gary Schnitkey, Ph.D., with the University of Illinois College of ACES. The survey is part of an ongoing and larger annual Land Values and Lease Trends project conducted by the Society.

The survey results were released today at the Farm Progress Show being held in Boone, IA.

According to the survey, below $4 per bushel prices paid for corn are expected to continue into 2017 with some decreases in production costs expected. Cash rents paid are also expected to drop about $20 per acre.

Farmland Values and Volumes
Survey respondents indicated that land values decreased 3.3 percent for Excellent-quality farmland; decreased 4.5 percent for Good-quality land; 5.6 percent of Average-quality land; and dropped 7.0 percent for Fair- quality land.

(In a normal year, Excellent- quality farmland averages over 190 bushels of corn per acre, Good- quality farmland averages between 170 and 190 bushels per acre, Average- quality farmland averages between 150 and 170 bushels per acre, and Fair- quality farmland averages below 150 bushels per acre. )

Respondents estimated prices paid for Excellent-quality farmland during the first half of 2016 averaged $11,100 per acre; $9,400 for Good land; $7,600 for Average-quality land; and $5,800 for Fair-quality farmland. Sixty three percent of those responding to the survey reported that less farmland was sold during the year and 85 percent expect the same amount of land, or less, to be available for sale in 2017. Typical buyers (64 percent) continue to be other farmers and there are no expectations of significant changes in this.

Respondents indicate they are split on whether there will be the same or more demand for land with 48 percent expecting there will be some decreases in demand and 51 percent anticipating no change or a very slight increase.

Price Expectations
Overall, respondents are more pessimistic about prices at midyear this year compared to recent surveys with a full 90 percent expecting some further decreases in values ranging from 1 percent to 10 percent. Corresponding decreases on per-acre-return are also forecast with 49 percent expecting a drop between $25 and $50 per acre and 16 percent predicting decreases of more than $50 per acre. A mere 2 percent expect returns to increase and then only very modestly.

Cash Rents
While a full 93 percent expect corn yields to be above average they expect the price for corn to be around $3.45 per bushel. A full two-thirds of respondents expect a ‘slight’ decrease in production costs. All of this leads to expectations that cash rents will continue their decline along the lines of land productivity.

Expected rents for 2017 for Excellent- and Good-quality land are expected to decrease by 7 percent; 9 percent for Average land; and 6 percent for Fair farmland.





Currently the most popular type of lease arrangement is for Cash Rent (32 percent) followed by Share Rent (29 percent), Variable Cash Rent (20 percent), Modified Share Rent (12 percent) and Custom Farming (7 percent). Respondents indicate Share Rent leases and Fixed Cash Rents will decrease in use while Variable Cash Rents will become more popular.

The ISPFMRA will be conducting its annual Land Values and Lease Trends Survey over the upcoming winter months. The results of this larger survey will be released at the 2017 Illinois Land Values Conference set for March 23, 2017 at the DoubleTree by Hilton in Bloomington, IL.

Don't Bet the Cash Rented Farm on a Loss

It is very difficult to give up a farm, even one that is losing money because the cash rent is too high. Todd Gleason has a few simple guidelines one might follow to help them make that decision.

Decreasing 2016 Cash Rents on Professionally Managed Farmland

Cash rents on professionally-managed farmland are set to decrease next year. That’s the conclusion of a survey in the state of Illinois.

Original Survey
Schnitkey Article

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.