Rents on prime U.S. crop land are expected to stay high in 2014 despite a sharp drop in grain prices, raising financial pressure on farmers who rent most of their land and risk big losses in the coming year, analysts and bankers say.
More than half the 250 million acres (101 million hectares) of corn, soybean and wheat land in the United States, the world's biggest grain exporter, are rented. Negotiations on 2014 farm land leases are going on in the Corn Belt and Great Plains, with farmers, absentee owners and their farm managers, and farm lenders all penciling out projected grain growing profits and losses.
"With the recent drop in crop prices and the stickiness of land rents not falling as quickly as crop prices, many farmers are feeling the squeeze once again between revenue, costs and rent," said Kent Olson, an economist at the University of Minnesota.
That is a marked difference from five years of record or near-record farm income driven by record demand for biofuels and exports, capped with record grain prices in 2012 during the worst U.S. drought in 50 years. Now things have changed. The record large U.S. harvest in 2013 bins has dropped grain prices 30 percent in six months.
Bottom-line estimates for growing corn in 2013 in northern Illinois, for instance, now project a loss of $81 an acre compared to net gains of $188 an acre in 2012 and $251 in 2011, according to farm economist Gary Schnitkey of the University of Illinois.
For 2014, projections based on current costs and prices pencil out to a loss of $53 an acre for corn, he says. The outlook is similar in Iowa and Minnesota, which with Illinois produce more than a third of all U.S. corn and soybeans.
The problem for renters, though, is two-fold. Lease rates almost always lag drops in grain prices as landowners see what the market will bear. And farmers usually chase land prices for fear of losing the acreage in future to some other neighbor who will risk and pay more.
"We've negotiated about 75 percent of our leases and we have not seen cash rents change from last year. In some isolated cases, they are going up," Jim Farrell, head of Farmers National, the largest U.S. farm manager with 1.2 million acres under contract, told Reuters.
Farrell, who has negotiated farm rents for decades, said: "The level of tension with landowners is perhaps a bit higher. But cash rents are kind of sticky. They don't move down as rapidly as farmers would like and they certainly didn't move up as rapidly as landowners would like."
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