Minding Ag's Business

Tis the season for serious 2013 cash rent negotiations as well as Christmas. But aggressive cash rent bidders beware: Yes, some high-profit corn operators can afford to pay hundreds of dollars per acre more to pick up a new rental parcel than their competitors in any given year. But the ability to pay extreme rent on that new farm can be easily sabotaged if rosy assumptions on revenues or yields fail to materialize.

One method to calculate what you can afford for expansion is to assume you can cover overhead and fixed costs with existing acres, so incremental acres need only cover your variable costs, says AgriSolutions financial analyst Sam Bachman.

Of course, this assumes you have excess management, labor and equipment capacity to take on more acres, he adds. "If capacity is there, your 'maximum rent' would be your variable costs (per acre revenue minus per acre expenses for seed, chemical, fertilizer and crop insurance)," Bachman says.

A study of approximately 100 commercial corn growers in the AgriSolutions AgIQ database tells two significant stories. All these operations use managerial accounting and adjust cash expenses for accrual. In most crop years between 2008 and 2011, similar operators could have afforded to pay anywhere from $200 to over $1,000/acre to rent a new piece of ground, so it was important for operators to approximate their individual costs before bidding and not use an industry average.

But watch what happened to a real 1,500-acre Illinois corn grower whose normal 200-bu. yields fell to subpar levels in 2010 and 2011 (see red on the DTN online chart). "The operator could easily have afforded to pay $500/acre on a new farm in 2008 and 2009, but by 2010, $334 per acre would have really hurt," Bachman notes.

Parts of Illinois have experienced three consecutive years of below average yields and lingering drought raise further concerns for 2013. "We tend to think we'll beat the odds, but this guy did not," Bachman says. "So when calculating your rent capacity, don't use just one scenario. Consider what happens to breakevens if you have less than normal yields or a big swing in prices."

Some growers who apply manure or have specialized crop rotations must commit to multi-year leases. In those cases, flex rent formulas may limit some of their risks by only paying landlord bonuses after high-revenue years.

"The key is, don't put yourself in a situation where two or three consecutive below-average years is enough to cause insolvency," Bachman says.

Read and comment on all DTN Ag Business Benchmarks on DTN's Minding Ag Business blog.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

(SK/CZ)

© Copyright 2012 DTN/The Progressive Farmer. All rights reserved.