By David Bau, Extension Educator
University of Minnesota Extension Service
Each year I complete an Operator's Cash Rent Worksheet. This examines what a farm operator can afford to pay the landlord for rent after covering the production costs and labor. For the 2014 crop, examples on the worksheet indicate production costs of $656 per acre of corn and $353 for soybeans. Compared with corn yields of 175 bushels of corn priced at $4.50 per bushel and 46 bushels of soybeans at $11.50 per bushel, a farmer would have $154 left to pay toward land costs in a 50-50 corn soybean crop rotation. Currently the 2014 new crop cash corn prices are at $4.19 for corn and $11.14 for soybeans in Worthington, applying these prices in worksheet, the rent would calculate at $118 per acre.
For farmers to pay rents above $200 per acre as is happening across much of Southern Minnesota, they will need the corresponding yields and price remain at these high levels. There are much higher rents being paid for 2014 and higher rents will necessitate commodity prices increasing to 2013 prices. Cash fall prices offered for the 2014 crop are over $2.00 lower in soybeans when you compare nearby cash prices for the 2013 beans. For corn nearby cash prices and the forward contract price offered for 2014 corn are almost the same. On top of this, Southwestern Minnesota is considered in a moderate drought. We were dry at this time last year before heavy spring rains restored subsoil moisture, so spring rains will be necessary again to produce normal yields in 2014.
Farmers in the three marketing groups I work with are challenged to implement their 2014 pre-harvest marketing plans with prices available below their breakeven prices. Historically pre-harvest marketing would be a good decision, and last year it would have work out well, but prices fell throughout the year after the revenue insurance prices were set at the end of February. The prices for November 2014 soybeans and December 2014 corn have not been at profitable price levels that would cover projected expenses since the 2013 harvest. Current prices offered are well below the breakeven prices necessary to make pre-harvest sales. If they would market their crops at current price they would be locking in a loss. The short crop in 2012 produced a long downward tail as the record 2013 corn crop came to market. Soybeans supplies are still relatively tight so 2013 soybeans prices have not fallen as dramatically and the March 2014 bean contract is close to the high price. But the November 2014 prices have steadily declined.
One year ago cash prices were above $7.00 corn and $14.50 for soybeans while the fall 2013 cash forward prices, were close to $5.00 for corn and $12.00 for soybeans. So it was hard for farmers to sell any of the 2013 crop at prices lower by $2.00 or more per bushel. At the same time 2014 corn was 10 to 15 cents lower and soybeans were 40 to 50 cents lower. With the long tail, marketing at these much lower prices would have been a good decision in hindsight.
Current prices are below prices necessary to cover 2014 input costs for corn and soybeans. The average for three marketing groups is $5.05 for corn and $12.36 for soybeans. The weather over the next few months will have a dramatic impact on prices, if we stay dry and get a smaller crop prices should go up significantly, but we receive rain and have a normal crop, prices will remain at these lower unprofitable levels.
Another worksheet I complete each year is the Landowner's Cash Rent Worksheet. For 2014, I used a value of the farmland of $7,000 and included a return of 3 percent on this value and added the cost of property taxes and liability insurance and divided by the tillable acres to determine a value of $241 per acre rent. I complete a survey of bare farmland sales for 14 southwestern Minnesota counties and in the first six months of 2013 average sales prices were $8,466. The highest sales listed were over $15,000 per acre. I utilized the Land Economics website which lists the average sales price for all agricultural land sold in 33 Southern Minnesota counties was $4,274 in 2010, $4,826 in 2011 and $5,825 in 2012. Interest rates are near all-time lows and land values are at all time highs so that is why I used a 3% rate of return.
Utilizing both of these worksheets will help determine what fair land rental rates are. Average actual cash rents reported in 14 Southern Minnesota Counties increased from $149 in 2009 to $160 in 2010 and $177 in 2011 and $209 in 2012 an increase of 18 percent from 2011 to 2012. So what will happen in 2014? Farmland rents across Minnesota increased by 18% from 2012 to 2013 in a survey completed by Minnesota Agricultural Statistic Service. For the last five years rents in Minnesota have been increasing at a rate of 10.8% each year and in Southwest Minnesota farmland rental rates increased at 12.1% per year in the FINBIN database. If you applied a 12.1% increase to 2012 Southwest average of $209, the 2013 rent would be $234. If you applied 12.1% again for 2014, the average rent would increase to $263 in 2014. The lowest average 2014 projected rent is $211 per acre in Lincoln County with the highest average of $319 in Martin County.
If a farmer wants to try to share some of risk with the landlord and not pay a large cash rent rate, a flexible agreement may be appropriate. There are many ways to determine a flexible rental agreement. The 2014 crop year has yet to be planted, but negotiations take place through the year in Minnesota and are needed to determine a fair cropland rental rate. The trend in commodity prices is that corn futures prices are below $5.00 through 2017 and decline each year for soybeans reaching a low of $10.69. For rents to continue to increase, future year commodity prices will have to increase, yields will have to increase or input costs will have to go down or some combination of these variables.
The 2014 Farm Resource Guide is available for a fee, it includes flexible rental agreement information and the worksheets referenced in this article. If you would like a copy please e-mail me at email@example.com or give me a call at 507-372-3900 Ext. 3906 and let me know what format (paper, cd or email) you would like to receive the Farm Resource Guide in.