Landlords and tenants may wish to renegotiate 2005 and 2006 cash rents because fewer funds will be available to pay them, according to a University of Illinois Extension study.
"Per acre corn and soybean returns in 2005 and 2006 are projected to be significantly lower than returns in 2003 and 2004," says Gary Schnitkey, U of I Extension farm financial management specialist and co-author of the report with fellow Extension specialist Dale Lattz. "As a result, fewer funds will be available to pay cash rents in 2005 and 2006."
In addition, Schnitkey noted, fertilizer and fuel costs have increased dramatically, causing soybean profitability to increase relative to corn profitability. Cost increases have been higher for corn than for soybeans. In 2005, soybean production is projected to be more profitable than corn production by $61/acre. For 2006, soybean production is projected to be $10/acre more profitable.
"Shifting acres to soybeans may be prudent," he says.
Fertilizer costs have increased dramatically, particularly for nitrogen. Schnitkey says that these increases suggest lowering fertilizer rates and, perhaps, experimenting with lower rates in some fields may be warranted.
"Higher fuel prices suggest reducing fuel use," he added. "One way may be to reduce tillage passes, particularly 'deep' tillage passes that have high fuel use."
The complete report, "2005 and 2006 Crop Budgets: Implications for Cash Rents and Production Decisions," is available on Extension's farmdoc Web site in the Farm Economics: Facts and Opinions section. The web address is: http://www.farmdoc.uiuc.edu/manage/newsletters/fefo05_16/fefo05_16.htm.
"Large variable cost increases have occurred since the 2001 through 2003 period resulting in lower profitability to grain farming," says Schnitkey. "Over the next few years, there are no signs that these variable cost increases, led primarily by fuel and fertilizer price increases, will abate.
"In some cases, renegotiating cash rents to lower levels may be warranted."
Schnitkey noted that cash rents have been increasing in Illinois, with some "aggressive" cash rents greatly exceeding $175 per acre.
"A $175 per acre cash rent results in projected losses of $97/acre in 2005 and $27/acre in 2006," he noted. "Renegotiation may allow farmers to maintain profitability."
Looking beyond 2006, Schnitkey and Lattz believe that returns will be, on average, closer to projected 2006 levels than to 2003 and 2004 levels.
"High returns in 2003 and 2004 were obtained because of above average yields, relatively high prices, and large government payments--particularly in 2004," Schnitkey says. "These conditions may repeat themselves but are atypical. Using historical returns as a guide, high returns occur about one in five years.
"As a result, using 2006 projected returns when setting cash rents seems prudent rather than actual results from 2003 and 2004."