What is in this article?:
- Cash Rents Given Differing Price Levels
- Key points
Several key points result from the above comparisons. First, it is difficult to set cash rents in the current price environment at levels that will not have to be revised in future years. For example, one strategy could be to set cash rents based on long-run prices ($4.50 corn price and $10.50 soybean price) and then leave those rents unchanged in future years. This strategy would result in cash rents that are significantly below those being currently negotiated. For central Illinois with high-productivity farmland, long-run prices result in a $341/acre operator and farmland return, suggesting cash rents in the low to mid-$200 range. A mid-$200/acre rent is significantly below average cash rents in central Illinois, where several counties have average cash rents above $300/acre. Cash rents in the low to mid-$200 range for high-productivity farmland would result in high farmer returns over the past several years.
Second, the cash rental market could look fundamentally different in the future if corn and soybean prices are lower. A return to lower prices would result in much lower operator and farmland returns, leading to downward pressure on cash rents.
Third, one of the results of rising cash rents and volatile price environment is that farmers are taking on much more risks. In recent years, revenue declines have not resulted in widespread losses to farmers. In some year, revenues will decline after cash rent rates have been set, such that farmers will take losses.
Finally, several years of lower prices will be transmitted to many landowners in the form of lower cash rents. The question will be how many years it will take for cash rents to decline once a low price environment occurs. While landowners may wish to mute return changes over time, achieving that aim is not entirely possible given the variable price environment.