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Mon February 3, 2014
For Farmers With High Cash Rents, 2014 Could Be A Tough Year
With the price of farmland at record levels across the Corn Belt, many farmers have been renting acres to plant. Now, with the price of corn and soybeans in free fall, farmers that depend on renting risk big losses if they’re unable to negotiate lower rents.
In central Illinois, farmers often pay neighboring landowners a premium to cash rent, a contract under which the landlord and tenant farmer agree to a fixed price per acre. In some fertile counties including Sangamon, cash rents reached nearly $400 per acre in 2013, about four times the median lease price for non-irrigated farmland in the Corn Belt, according to the USDA.
Corn hit a record high at over $8 per bushel in 2012. With corn expected to remain closer to $4 per bushel this year, growers are caught between those high rents and the low corn prices.
“As you listen to stock market and stuff, you hear about bubbles,” said Garry Niemeyer, an Auburn, Ill. farmer and former President of the National Corn Growers Association. “This is probably a bubble in prices that are not here now.”
Spurred by commodities, land prices inflate
Farmers put a lot of money into their operations. After buying a $500,000 combine, they want to harvest as many acres as they can get their hands on.
But the price of farmland in the Midwest has skyrocketed in recent years, thanks mostly to high prices for big commodity crops like corn and soybeans.
The land is too costly for many farmers to buy, which has many going for rentals.
“They don’t have the financial resources to buy that land, so they rent land from others,” said Gary Schnitkey an economist at the University of Illinois.
Tim Seifert farms in one such costly area, southwest of Springfield, Ill. Each year he negotiates with more than a dozen landlords.
Seifert says the higher cash rent price in central Illinois is worth it, given the quality of the land.
“This ground is very rich, it’s deep,” Seifert said. “There [are] places you can go just twenty, forty miles south of here that the top soil’s only twenty-four inches. Where(as) we’ve got almost four foot of good top soil.”
Rents are often “sticky,” economists say – they don’t often rise and fall quickly to reflect market forces. So after years of high commodity prices, and high land values, a sudden drop in corn prices will put renters in a bind.
Caught in the middle
Seifert believes the “roller coaster ride” of corn prices is now over, and economists say that farmers who cash rent on expensive land will have to tighten their belts as rental prices lag behind the quickly falling price of corn.
“We don’t have $8 (per bushel) corn. We don’t have $15,000–an-acre farmland,” farmer Garry Niemeyer said. “Yet we’re cash renting like we did.”
The average value of cropland in corn country like Illinois and Iowa is about three times higher than it was a decade ago. That boom has pushed up cash rents, which farmers have been willing to pay because they’ve been getting high returns for their crops.
But retired Iowa State University Economist William Edwards urges anyone relying on farmland income to do some careful math in 2014.
“I think owners are willing to listen and look at how those things have changed,” Edwards said. “But it helps to actually lay out the numbers and get a better idea of just what the possible returns are for the next year.”
It’s still impossible to know just how much a bushel of corn will go for at harvest time. But it’s a good bet it will be lower in 2014 than in recent years. If rental agreements aren’t also cheaper, a lot of farmers may struggle to stay in the black.