High cash rents to squeeze Midwest grain farmers in 2014
Economist Schnitkey agreed that landowners have the upper hand. They often charged lower rents in recent years before catching up with record high grain prices. So they are in no mood to lower rents. Tenants, on the other hand, fear the loss of acreage even at currently projected negative returns.
"A crop farmer can't make money if he doesn't farm land," Schnitkey said. "Actually, they are a pretty optimistic about their chances. They have money and they are in a pretty good financial situation. Over the past 10 years, if you bid too high a cash rent, higher prices have bailed you out. So it's worked out in the past," he said. "Now, it may not work out."
THE BIG SQUEEZE
"Iowa remains the bellwether farm state with more land under cultivation than any other state," said Michael Duffy, an Iowa State University economist and author of the state's annual farm land survey, a benchmark for bankers and farm economists.
Average cash rents in Iowa and Illinois run about $260 an acre to $300 an acre, but there are some who have paid $500 an acre to $700 an acre in recent years to ensure a big land base and grain market supplies.
"For some people it is going to be very serious," Duffy said of the high rents, "but I don't think it's going to be the majority."
Most Iowa farmers have strong balance sheets, paid off their debt after years of record income, and many own a large percentage of the ground they farm. In Iowa, three-quarters of farmland is now held without any debt, Duffy said.
"Those farms with all cash rent farmland will have much higher cash outflows than farms with owned land," Schnitkey said. "The 90 percent figure is a benchmark for those who will face difficulties."
Why do farmers agree to rents that project a net loss?
Kevin Dhuyvetter, a farm manager at Kansas State University, said that the nature of farmers - a hopeful and optimistic breed - often means their desire to keep a hold on acreage and gain production out-weighs caution.
"Farmers probably have to lose money one or two years in a row before rents back off," Dhuyvetter told Reuters. "I think the horror stories more likely will be coming out of the Corn Belt because that's where we heard of the astronomically high rents." 1 acre = .405 hectares