With high production costs in 2009 and low commodity prices, many cash rent farmers may be thinking about that call to the landowner to set a date for discussing leasing arrangements in 2010. “Will the landowner want more rent? How can I afford to pay any more? Are there any alternatives?” Oh, the questions that we ask ourselves!

Cash rents for farmland began climbing in 2007 and exploded higher for the 2008 crop year in many areas of the Cornbelt, thanks to higher commodity prices. Iowa State University ag economist William Edwards reports the average cash rent in Iowa jumped from $150 per acre in 2007 to $177 in 2008, but the upward trend slowed going into 2009 when the average was estimated at $185 per acre. Edwards wonders, “Has the bubble burst for 2010?”

To arrive at a fair cash rent for 2010, Edwards suggests a methodical look at price prospects, input costs, and safety nets.

1) Futures market prices for the 2010 crop may give both operators and landowners some indication of profit potential. If landowners are looking at Chicago Board of Trade prices, they need to realize that cash markets are going to be lower than futures contracts and harvest prices will be 30¢ to 40¢ lower than futures. Edwards says that late 2008 futures prices were offering $6 for corn and $14 for soybeans and farm operators were bidding for land. In the past year the ethanol demand has declined, ethanol profitability has been low, livestock numbers are down, and grain prices have dropped accordingly.

Edward says subtracting a 40¢ basis from July futures leaves $3.40 for corn and $8.30 for soybeans next year, which means gross profits will be down even with good prospects for production. He says a 170 bushel corn yield, 50 bushel soybean yield, and $20 for direct payments, will result in a $598 gross for corn, $435 for soybeans.

2) Pricey crop inputs can exacerbate cash rent that is already high. However, Edwards says all indications point to lower costs for some inputs in the 2010 planting season, particularly those that are energy related. Fertilizer is the key one, and anhydrous ammonia prices are back down to more traditional levels. Edwards says the cost of fuel is lower than year ago levels, as is the cost of propane for those who will have large bills for drying corn this fall. Seed and pesticide prices continue to creep upward.

When the totals are in yours may vary from what Edwards calculates, but he is expecting a $57 decline in corn production costs and a $16 drop in planting soybeans in 2010. But he says those drops will not offset the lower prices for grain. When he subtracts the non-land costs from estimated gross revenue, Edwards says that leaves $174 for corn and $164 for soybeans that can be used for rent and profit.

3) Beyond the government farm program, one of the primary revenue safety nets used by many farmers is revenue-based crop insurance. 2008 provided checks to many farmers because fall grain prices were lower than they were early in the year when the price guarantees were established. For 2009, farmers with revenue crop insurance have a $4.04 corn guarantee and an $8.80 soybean guarantee. Using 75% coverage levels, that guarantees $3.03 and $6.60 at harvest, minus the basis.

The ACRE program could provide funds for farmers who enrolled by the mid-August deadline, however, any payment earned will not be made until the fall of 2010. Edwards says the Iowa state guarantees of $635 for corn and $457 for beans would give farmers in his state a guarantee of $3.65 for corn and $9.12 for beans. If you are signing the lease for 2010, remember that ACRE payments cannot change more than 10%, so any decline would be limited to $3.28 and $8.21. Compare those to the futures price minus the basis for fall 2010 delivery.

Edwards tell farm operators and land owners to consider those issues as they enter negotiations on the 2010 cash rent lease. One of the ways to make the lease more responsive to changes in the agricultural economy is the convert the cash rent to a flexible lease that contains adjustment factors based on prices, yields, or other variables.

Entering into a new cash rent lease for the 2010 production season should not be an emotional process but a methodical one that can result in a fair treatment for both the operator and the land owner. Potential grain sales revenue should be estimated, along with costs of inputs and any farm program payments. Once income and outgo is known, that leaves the amount that farmers can either bank as return to labor and management or to pay out in cash rent.

Source: Stu Ellis, University of Illinois