Corn and soybean prices have been high in recent years, leading to high farmland returns and increasing cash rents. In the following article, the ability to pay cash rent is examined under differing corn and soybean price scenarios that are likely to occur over the next several years. These price scenarios include 1) 2013 price estimates, 2) long-run price estimates, and 3) low price estimates. The 2013 price projections yield returns that can sustain high cash rents. Lower prices likely will lead to downward pressure on cash rents.
Operator and Farmland Returns
Ability to pay cash rent is based on operator and farmland return, which equals gross revenue minus non-land costs. From operator and farmland return, the farmer and landowner receives their returns. Take, for example, an operator and farmland return of $510 per acre. If the farmland is cash rented and the cash rent is set at $325 per acre, the farmer will have a return of $185 per acre ($510 operator and farmland return - $325 cash rent).
click image to zoom In Table 1, estimates of operator and farmland returns are shown for central Illinois farmland with high productivity, central Illinois farmland with low productivity, and southern Illinois. These regions are shown to represent the impact that yields have on operator and farmland returns. For the three regions, average corn yields are 194 bushels per acre for central Illinois farmland with high-productivity, 180 bushels per acre for central Illinois farmland for low-productivity, and 155 bushels per acre for southern Illinois. Note that non-land costs vary little across these yields. For example, non-land costs for corn-after-soybeans are $510 per acre for central Illinois with high-productivity farmland, $541 for central Illinois with low-productivity farmland, and $493 per acre for southern Illinois. Hence, lower yields will result in lower operator and farmland returns, further leading to lower cash rents. In the following examples, operator and farmland returns are given for central Illinois farmland with high-productivity. Of the regions shown, this region has the highest yields of the regions shown, resulting in the highest operator and farmland returns and the highest cash rents.
Three different price scenarios are shown in Table 1, representing likely price scenarios over the next five to ten years. The $5.50 per bushel corn price and $12.50 per bushel soybean price currently represent conservative price expectations based on 2013 harvest-time futures contracts. At these price levels, the operator and farmland return for the central Illinois farmland for high-productivity is $510 per acre. This return level would support high cash rents. Take, for example, a $325 per cash rent, close to the average cash rent in several central Illinois counties (see here). There will be many rents significantly higher than these averages. A $325 per acre cash rent would result in a $185 per acre to the farmer ($185 farmer return = $510 operator and farmland return - $325 cash rent). Even cash rents in the $400 range are estimated to provide positive returns to farmers.