Grain farms with a higher percentage of acres cash rented will have much lower incomes when commodity prices decline than farms with lower percentages cash rented, according to University of Illinois Agricultural Economist Gary Schnitkey.
Schnitkey used a 1,200-acre cash grain farm to illustrate four different price scenarios. The farm has expected yields of 187 bu. of corn and 54 bu. of soybeans, grows corn on two-thirds of its acres, has non-land costs of $546/acre for corn and $306/acre for soybeans, and has $480,000 of debt.
The four price scenarios are as follows:
- Projected 2012 prices ($5.40 for corn, $11.70 for soybeans)
- Long-run prices ($4.50 for corn, $10.50 for soybeans)
- Low-price year ($3.50 for corn, $8.20 for soybeans)
- Poor-price year ($3 for corn, $7 for soybeans)
Incomes are generated for a typical farm with 10% of acres owned, 30% share rented and 60% cash rented ($275/acre cash rent). The typical farm is compared to a farm that cash rents 100% of its acres for two cash-rent levels: $275/acre and $350/acre.
"Projected 2012 prices of $5.40/bu. for corn and $11.70/bu. for soybeans result in above-average incomes, and most farms would have good financial incomes," Schnitkey says.
"Price reductions to long-run averages result in lower incomes, particularly for farms with high percentages of cash rent. At high cash rents, farms with 100% of their farm cash rented would have negative incomes. Lower prices would result in further reductions in net incomes.”
When lower commodity prices occur, farms with high amounts of cash rents will face difficult decisions, Schnitkey explains.
"Attempts may be made to lower cash rents so large financial losses do not occur," Schnitkey says. "Alternatively, these farms will have to absorb financial losses under the hope that commodity prices turn upward quickly so that the farm moves into a positive income situation."