Consider Higher Costs, Additional Risk When Negotiating 2008 Cash Rents

Farmland owners and producers should consider higher costs and additional risk when negotiating 2008 cash rents, advises University of Illinois Extension economist Gary Schnitkey.

“Increased risk during the upcoming year suggests caution in increasing cash rents,” says Schnitkey. “Much larger farmer margins will need to be in place for similar risk levels as compared to the 2001-2005 period.”

Schnitkey’s conclusions are based on his study, ‘Consider Higher Costs and Additional Risk When Negotiating 2008 Cash Rents,’ available on the U of I Extension Farmdoc website, www.farmdoc.uiuc.edu.  Data used in the study came from local Farm Business Farm Management (FBFM) Associations across the state.

As a result of higher expected commodity prices, Schnitkey expects cash rents to rise in the 2008 cropping year. “While higher commodity prices will increase farmland returns, caution should be exercised in increasing cash rents,” he notes. “Higher production costs and lower government payments will offset some of the revenue increases from higher commodity prices.”

“Moreover, additional risk associated with crop farming suggests that farmers should receive a larger portion of the returns. If cash rents increase so that a farmer receives the same margin in 2008 as in 2001 through 2005, farmers will be in much riskier positions.”

In central Illinois, for example, Schnitkey says farmer margins need to more than double for farmers to be in the same risk position in 2008 as compared to 2001-2005.

The study compares actual revenues and costs from 2001-2005 compared to projected 2008 returns. The period 2001-2005 represents a period of lower commodity prices. During that period, central Illinois farmers received an average of $2.22 for corn and $5.89 for soybeans.

“Projected 2008 prices based on Chicago Board of Trade futures contracts are significantly higher than 2001-2005 prices,” he says. “A $3.50 corn price and an $8.50 soybean price are used in 2008 budgets. Given higher projected prices, crop revenue will be above 2001-2005 averages. But offsetting some of the projected crop revenue gains are higher costs.”

Total non-land costs for corn production in Illinois are projected at $314 per acre in 2008, an increase of $57 per acre from the 2001-2005 level.  “The largest increases come from fertilizer at $27 per acre, seed at $11, crop insurance at $5, fuel and oil at $5, and crop insurance also at $5,” Schnitkey says.

Total non-land costs for soybeans in Illinois are projected at $199 per acre in 2008, an increase of $28 per acre, with the highest increases coming in seed ($9), fertilizer ($8), fuel and oil ($5), and interest ($5).

Lower projected government payments also cut into the higher projected revenue. Exact commodity programs will not be known until the new farm bill is passed so Schnitkey assumed a continuation of the 2002 farm bill levels of support. Due to the way that program operates; he expects government payments to decline by $27 per acre in 2008.

“Farmers will face additional risk for three reasons,” he says. “First, price variability likely will be higher over the next several years. Second, risk will increase because federal commodity programs will not provide as much downside price protection. Finally, revenue for crop insurance must fall more in periods of high prices before insurance programs are received.”