Renegotiating cash rents down for 2015
Actual cropland returns in 2013 and projected returns in 2014 and 2015 are considerably below returns from 2010 through 2012. In many cases, projected 2015 returns will be lower than current cash rents, likely require renegotiating for lower cash rents. This article evaluates these situations by 1) identifying farms requiring adjustments in cash rents, 2) identifying how far cash rents must be lowered, and 3) providing comments for both land owners and farmers.
Farms Requiring Adjustment Downward
Two factors will impact the need for adjusting rents downward. The first is the farm's cash rent relative to the average rent for farmland of similar productivity. There is a considerable range in cash rents for farmland of similar type. Some rents are $100 per acre higher than the average, and some farms can be $100 lower than the average. Those cash rents that are relatively lower will not require adjusting downwards. Downward adjustment in cash rents likely are needed for relatively high cash rents.
Sources for average cash rents are readily available. A map with average cash rents by Illinois County is available (farmdoc daily September 10, 2013). This county data is from U.S. Department of Agriculture. Based on this data, average cash rents for different expected corn yields have been constructed:
140 bu expected corn yield has an average cash rent of $151 per acre,
160 bu expected corn yield has an average cash rent of $205 per acre,
180 bu expected corn yield has an average cash rent of $259 per acre, and
200 bu expected corn yield has an average cash rent of $313 per acre.
The second factor is how fast cash rents on a farm have gone up in recent years. Between 2006 through 2013, average cash rents increased in Illinois by an average of 7.7% per year. This means that the average cash rent is 68% higher in 2013 as compared to 2006. If the cash rent on a farm has lagged these increases, there may be rational for keeping the cash rent high into 2015.
As an example, take a farm that has a 200 bushel expected corn yield that had a cash rent of $179 per acre from 2006 through 2012. The cash rent then increased to $300 per acre in 2013. Keeping the $300 cash rent in 2015 could be justified because the landowner did not get as much return in 2006 through 2012, even though the farmer likely will face a loss. (As an aside, allowing cash rents to lag agricultural returns is not a recommended practice.)
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