AgDM newsletter article, April 2000

Comparing cash rental rates to net returns to land

by William Edwards, extension economist, 515-294-6161, wedwards@iastate.edu

0ver the long term, cash rents tend to adjust to the economic conditions that affect profits from corn and soybean production in Iowa. These adjustments do not take place immediately, however. Moreover, the adjustments are small compared to the changes in profits from year to year.

The tables that accompany this article show the estimated average returns to land from corn and soybean production over the past 11 years. They are compared to the estimated average cash rent paid in the state each year. In seven of those years returns were estimated to be higher than rents, indicating at least a small profit for the average renter.

The most disastrous year was 1993, when floods and heavy rains reduced crop yields severely, with only a modest compensation on the price side. Moderate losses

were estimated for 1991, due to low yields with only average prices. For 1999, margins are estimated to be slightly negative, or at best breakeven, due to the lowest market prices seen in years.

From 1994 through 1997, profit margins were estimated to be nearly $50 per acre, except for corn in 1997. This explains in large part the upward pressure on cash rents experienced in the past few years. It should be emphasized, however, that this analysis only represents general economic trends in the state, and may not be representative of any individual farming operation.


Table 1. Estimated net returns to land for corn-1989-1999 state averages lowa

Crop year Yield Season price Gross revenue Govt. pmt. Crop Ins pmt Non-lad costs Land return Cash rent
1989 118 $2.29 $270 $44 $4 $202 $116 $96
1990 126 2.21 278 31 2 200 112 100
1991 117 2.30 269 21 2 206 86 101
1992 147 2.00 294 25 1 188 132 105
1993 80 2.44 195 16 14 199 26 108
1994 152 2.22 337 32 0 197 172 107
1995 123 3.20 394 0 6 207 192 105
1996 138 2.60 359 16 3 207 171 110
1997 138 2.33 322 30 1 210 143 119
1998 145 1.86 270 24 5 208 90 119
1999 149 1.80 268 32 3 208 95 117
average 130 2.00 296 24 4 203 121 108
Sources: Prices and yields from Iowa Agricultural Statistics. 1999 price forecast. Costs from ISU Extension FM-1712, Corn following soybeans, medium yield. Crop insurance payments from FCIC data. Average cash rent from USDA and ISU Extension FM-1845. Government payments from FSA. 1999 estimated.

Source of data and assumptions

Yields are the average Iowa yields for corn and soybeans as estimated by the National Agricultural Statistics Service (NASS) each year.

Market prices are the season average selling prices as estimated by the Iowa Agricultural Statistics office. Mid-month prices for the period September through August of the following calendar year are weighted by the fraction of the crop sold in each month to estimate the average marketing price received. The season average price for 1999 is a projection.

Gross revenue was calculated by multiplying the average yield and price together. The average government payment per acre was estimated by dividing the total program payments for the state by the total corn and soybean acres. For the last two years, estimated loan deficiency payments were also added. The values represent payments accruing to each year's crop, although they may have been received in a different crop year.

Crop insurance payments were calculated by dividing the total indemnity payments made for corn and soybeans each year for FCIC backed policies by the total acres of corn and soybeans planted. Payments received from supplemental hail insurance policies were not available and are not included. It should be noted that while a significant average payment was received only in 1993, many farms prefer to selfinsure, and many others have received substantial assistance from crop insurance coverage in certain years.

The non-land costs were taken from Iowa Crop Production Cost Budgets (File A1-20) each year. Estimates include seed, fertilizer, pesticides, insurance, drying, transportation, machinery, labor, and other miscellaneous costs. Costs for seed and chemicals have increased substantially over the past decade, but more efficient use of machinery and labor has offset some of this increase. The estimated return to land was calculated by subtracting the nonland costs from the total of income from sales, government payments, and insurance indemni

The average cash rent paid in Iowa was estimated from Farmland Cash Rental Rates (File C2-10) beginning in 1994, and from USDA surveys before that. Comparing average rents to the estimated return to land provides a succinct look at the profitability of corn and soybean production in Iowa over the last decade.

Table 2. Estimated net returns to land for soybeans-1989-1999 state averages-Iowa

Crop year Yield Season price Gross revenue Govt. pmt. Crop Ins pmt Non-land costs Land return Cash rent
1989 39.0 $5.62 $219 $44 $4 $142 $121 $96
1990 41.5 5.63 234 31 2 142 123 100
1991 40.5 5.51 223 21 2 151 93 101
1992 44.0 5.54 244 25 1 136 132 105
1993 31.0 6.34 197 16 14 142 70 108
1994 50.5 5.43 274 32 0 139 167 107
1995 43.0 6.65 286 0 2 141 145 105
1996 44.0 6.80 299 16 1 143 172 110
1997 46.0 6.33 291 30 0 144 177 119
1998 48.0 4.79 230 24 2 145 109 119
1999 48.0 4.65 223 49 2 145 127 119
Average 43.2 5.80 247 26 3 142 131 108

Sources: Prices and yields from Iowa Agricultural Statistics. 1999 forecast. Costs from ISU Extension FM-1712, Corn following soybeans, medium yield. Crop insurance payments from FCIC data. Government payments from FSA. 1999 estimated.

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