The easy answer is lower cash rents. The hard answer is how low? Economics always had a way of working things out. When you drop the price of a commodity 50% in three years including a drop of 25% since August 2013 then the squeeze is on. At the time of writing this article the forward contract price for corn at harvest is $3.19. On August 1, 2013 it was $4.30, on August 1, 2012 it was $7.59 and on August 1, 2011 it was $6.50. At the same time input costs have risen for most operators.
What about the price of soybeans? This has stayed better on average than corn. The dirty secret is that soybeans are a distant cousin to corn in determining cash rents. Iowa farmers raise corn first and soybeans second thus don’t base their economics on the second crop. Prices tend to vary and landowners shouldn’t base their rental decisions on prices in August just because the lease cancellation deadline is September 1.
The fact is there is a lot of variation in crop prices. In our office we keep track of the daily marketing opportunities during a marketing year. For instance for the 2013 crop we look at local forward contracting prices from March 2013 through October 2013 and then cash prices from November 2014 through July 2014. Realistically this is the range most growers sell grain. You can obviously forward contract earlier and hold grain to sell longer than that but you have to limit somewhere. The chart below shows the high, low and average for the last 3 marketing years plus so far for 2014.
From the chart above you can see that operators have opportunities to sell their grain at higher prices then what is offered in August of the year before the next leasing period. Please keep in mind that price is only one factor in determining profitability. Gross income is the main consideration which is a combination of price times yield. Everything being equal then the higher yielding farms will make more money and the tenant can afford more rent. I know this seems easy but we have already lost a lot of owners because they don’t have good yield data on their land to figure gross income. It makes a big difference from an average of 220 bu acre corn to 120 bu/acre. Some owners could be getting 220 bu/acre rent and only getting 160 bu/acre rent. Some owners can’t understand their tenant’s reluctance at $200/acre rent when they hear the others in the area are getting much more. Most tenants will let you know about poor yields and shy away from telling about the good yields. You can’t blame them. Most have never been asked that information or hard verification for it. They are just being good businessmen and not showing their hand. This area is where things are changing on the farm where the records are open and everyone is working to make the farm as profitable as possible. This way both the tenant and landlord are making a fair long term business arrangement and there is no need to worry about cancelling leases prior to September 1.
There is no good reason to not share with owners all the GPS maps, yield monitors, digital soil tests, fertilizer records and seed records sponsored by coops and seed dealers. There is no doubt that the future of farm leases are flexible cash rent leases. There is still some resistance from operators especially ones with reasonable or low cash rents. Some owners are reluctant since they like the simplicity of cash rents but most can get the rent they are currently getting guaranteed plus the chance for more after harvest. I am of the philosophy that more is better than less. We know some operators skimped on fertilizer in 2014 due to lower price gains. What will they and others do in 2015 if we stay where we are? The answer is the farm will have even less potential to make a good yield in the future. You need to be assured your farm in maintained to provide good yields and plant root structure to support good stands and less erosion. Landowners routinely find out too late that this is not the case.
So what became of the question, “What Will Happen to Farm Leases with $3.25/bu Corn?” In most cases the same old guessing game, guilt trip and anxiety session with the wrong lease amount chosen for one or both parties – don’t let this happen to you. The best alternative is adjustable cash rent with good records.
This is the best for both owners and especially younger operators who need flexibility and the chance to show they can produce and what they can do to make it work for both parties.