Projected commodity prices impact farms margins and rent

Part two in a four part series on land rent.

For all farm types, including livestock fruit, vegetables and field crops, net farm income dropped drastically over the past two years with a 16.3 percent drop in 2014 and 31.8 percent drop forecasted for 2015. This comes heals of a 128 percent increase during the five year period ending in 2013, which recorded near record levels at $128 billion according to the USDA 2015 Farm Sector Income Forecast. With this volatility in the marketplace, farms need to adjust spending patterns to reflect their ability to generate a positive net margin in their overall production system.

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Figure 1. U.S. net farm income, 2000-2015 (2014 and 2015 are forecasted numbers).

The days of $7 per bushel corn and $14 per bushel soybeans appear to be over. Today commodity prices for most crops have returned to something that is closer the levels seen prior to the recent five year price rally. In February of 2015 the market year average national corn price for averaged over the period of 2011 through 2014 was $5.31 per bushel (Table 1). The projected price of $3.50 for 2015 through 2018 that is a drop of income by 34 percent. For a corn, soybean and wheat crop rotation it is projected that this is over the next four years, crop revenues on an average will drop $161.65 per acre. Every farm will need make adjustments to cash expenses and overhead charges in order to keep the farm financially.

Corn

Soybean

Wheat

Average

Olympic Average Price (2009-2013)

$5.29

$12.27

$6.60

 

Next 5 years Market Year Average Price (2014-2018 est.)

$3.81

$9.42

$5.29

 

Bushels per acre

165

50

75

 

Change in Gross Income per Acre est.

-$244.20

-$142.50

-$98.25

-$161.65

 Table 1. Price projection of average prices provided by the Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign

Most farms will be able to cover the variable cost in the short term by using some of the economic gains earned over the past five years. But, looking at a longer term, if prices remain low, major changes will need to take place on farms to control overhead costs and make adjustments to rents and capital improvements to maintain sound financial situation. Long term, the farm must cover all costs and provide a reasonable return to capital replacement, overhead and management to be sustainable.

As farms move forward we are seeing many of the record high land values and land rental rates starting to move lower toward a more sustainable level with highest rents showing the most downward trend, with mid-range rents remaining more stable. Farms have and continue to use several resources to help them estimate their farms cost of production and identify what are reasonable and sustainable land costs are in the development of win-win land rental arrangements. Some budget estimate templates are available to be downloaded at the Michigan State University Extension’s, FIRM website where you can find the 2014 Crop Budget Estimate excel template. With a resource like this, a farm can input their farms projected costs and incomes and quickly develop some parameters for amount of cash available for land rent.

The basic rule is that over time the cropping system that is put in place on a farm must generate the net revenue above cash costs to cover all land costs. Many farms are now looking at total land cost across all acres and using that calculation to determine the cash rents that can be paid and the land values that the farm can support if land is being purchased. The bottom line is as a farm income decreases, farmers will have to carefully evaluate their cost of production and may have to renegotiate land rents that are affordable to them.

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