HADDONFIELD, N.J. (DTN) -- Midwest farmers know the record commodity markets of 2007-08 are long gone, but aftershocks to Corn Belt cash rents and profit margins live on forever.
Central Iowa farmers, like Dean Taylor of Prairie City, face a washout on some fields after receiving 10 to 15 inches of rain last week. Knocking 70 bushels per acre of potential out of a corn field would erase a renter's margins, given today's record rents. (DTN photo by Elizabeth Williams)
"There's a lot more financial risk in agriculture today than five years ago -- and it's substantial," says Ray Gaesser, who farms with his wife Elaine, and son Chris, near Corning, Iowa. Leading his list of threats are cash rents that inflated rapidly during the real estate run-up since 2005 and never moderated when grain markets cooled.
"Some lease increases are warranted, because corn yields have continued to go up," says Gaesser. "But farmers really need prices to stay above $4 for corn, and $9 to $10 for soybeans, to justify the rents."
Iowans continue to pay the highest average cash rents in the nation, and experts say there's little chance they will dip any time soon. Most analysts factor slight increases for 2011. Iowa rents have been elevated to a statewide average of $180 an acre today, up $50 an acre from 2005. Extreme rainfall this season -- with some parts of central Iowa receiving 30 inches of rain in the last 60 days -- will only exacerbate those risks should yields suffer as a result.
On highly productive farmland in central Illinois, the cash rent damage is even worse: It now averages $210 an acre, up from $150 five years earlier, with most land under farm management firm control actually going for $240 to $250, notes University of Illinois economist Gary Schnitkey. "We've never seen that large of an increase for a five-year period since we've been collecting the data," he says.
RENTERS SUFFERED LOSSES
Record rents also played a part in widespread losses suffered by cash renters there in 2009: Central Illinois farmers enrolled in the state's farm management association record system lost an average of $29 per acre on corn before paying themselves any return last year, the worst losses in a decade. Below-par yields, excessive fertilizer budgets and drying costs also contributed. Schnitkey projects an $83 profit on the same ground for 2010, however, and a possible $168 margin in 2011, given current input prices and average yields.
The bottom line is that typical Midwest corn growers spend over $650 an acre to plant a corn crop, up more than $200 per acre since 2006, Schnitkey says. That extra tab means renters shoulder more financial risk than at any time in several decades: When markets and yields hit expectations, growers stand to make respectable earnings. On the other hand, missed opportunities in marketing or crop damage from extreme weather can wipe thinly capitalized or under-insured operators out of business.
ADAPT TO HIGHER RISK
Even established farm operators must adapt to the higher risk scenarios. Gaesser fine-tuned his marketing plan to counter that risk by using more futures contracts to hedge, even though that required an extra line of credit."When markets offer you the opportunity, you have to be able to sell at least a year out and have the financing to back you up on margin calls," he says. "I always used to hedge half of my crops with futures contracts, but we're closer to 100 percent now."
Operators can also forward contract inputs to lock in major items like fertilizer, seed and diesel in advance, points out Iowa State University Extension Farm Management Specialist Steve Johnson. Farmers who ordered fall fertilizer prior to July 4 avoided the 20 percent run-up in anhydrous prices in recent weeks. However, that means operators must carry the cost of inputs more than a year before they harvest the crop. Bunching several years of input costs together hikes the need for operating capital.
Dean Taylor, a Prairie City, Iowa, farmer and incoming president of the Iowa Corn Growers Association, feels the perils to renters as well. "Three weeks ago, our crops looked great. We were looking at 200 bpa corn and above, but now even non-flooded fields that received 10-15 inches of rain in one week might top out at 120 to 130 bpa," he says. Thirty-two of Iowa's 99 counties have been declared presidential disaster areas, due to spring flooding, and another 57 Iowa counties, as of Aug. 5, requested federal disaster declaration after rains in July and August.
NOT ALL LAND EQUAL
Landlords need to understand that not all land is created equal, says Johnson. After three wet seasons in much of Iowa, he thinks highest cash rents should be associated with well-tiled fields. "Cash renters should be more in tune with drainage issues and the issue of enterprise units for crop insurance coverage," he says. "Renters should also consider moving to a flexible cash lease (instead of a fixed cash rent) if yield variability is a consistent problem."
Gaesser doesn't pay the highest cash rent in his southwest Iowa neighborhood, although he tries to stay competitive. He's already convinced some of his landlords to use flex leases, so they share the benefits in good years and risks in the bad. This fall, he's also hoping to build landlord loyalty with service instead of price: Since most of his rented farms received twice the normal rainfall this season, "we'll be rebuilding terraces and waterways for landlords,if we have the equipment, and we'll share costs if it's hired out. We want to show them we're here for the long-run."
See more discussion of cash rent negotiations for 2011 at the Minding Ag's Business blog.
For USDA's latest survey of cash rents go
http://usda.mannlib.cornell.edu/…
DTN Special Correspondent Elizabeth Williams also contributed to this story.
Marcia Zarley Taylor can be reached at Marcia.taylor@telventdtn.com
(ES/AG)
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