Producers and landowners need to use much lower prices when projecting returns for the 2005 cropping than those used for 2004 projections, says a University of Illinois Extension farm financial management specialist.
"These prices suggest using caution when making cash rent bids for 2005," says Gary Schnitkey.
Schnitkey's findings are contained in a Farm Economics: Facts & Opinions article available online at the farmdoc website or directly at: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo04_12/fefo04_12.html .
Schnitkey notes that many observers believe that cash rents for the 2005 cropping year will rise above 2004 levels because average cash rents have been increasing in northern and central Illinois for the past several years. Moreover, higher commodity prices during late 2003 and the first half of 2004 led to projections of higher agricultural profitability and were anticipated to further increase cash rent bids.
However, Schnitkey's calculations using the Farm Rent Evaluator spreadsheet tool available on farmdoc's FAST section project a different scenario. The spreadsheet compares returns for seven alternative leases based on user-entered farm budgeting information. Returns in Schnitkey's paper are reported for traditional 50% rent leases and cash rent leases having payments ranging from $140/acre up to $200/acre.
As Schnitkey noted, a picture of 2005 emerges from the analysis that is at variance with popular conceptions.
"Returns for cash rents in 2005 produced in the model are considerably lower than 2004 levels," says Schnitkey. "Forecasted returns given a $140/acre cash rent payment and average costs are $64/acre for 2004 and $36 for 2005, a decline of $28/acre.
"The $160, $180, and $200 cash rents also have declines of $28/acre between the 2004 forecast and the 2005 forecast. Cash rents of $180 and $200/acre generate farmer returns of minus-$4 and minus-$24, respectively."
Schnitkey said that using $28 of return as a benchmark finds farmer returns for cash rents of $140 and $160/acre exceeding the benchmark price.
He added that individual farmer results will vary from those in his report as cost structures and yields can vary tremendously across farms. His results should be viewed as indicative of trends between 2004 and 2005 rather than projections for a specific farm.
"But forecasts of returns for 2005 are lower than 2004," he says. "This fact does not support an increase in cash rents."