Leasing issues and rental rates for 2011
Last month in Ag Decision Maker one article reviewed the 2010 leasing rental rates. The article provided highlights from Information File C2-10, 2010 Iowa Cash Rental Rate Survey, which is available on the Ag Decision Maker website or at county extension offices. Where might rental rates be headed this coming year and are there any new issues to look at?
When landlords and tenants establish rental rates they often look at: what others are paying, average crop yields, Corn Suitability Rating Index, share of the gross crop value, the return on investment, percentage of the crop and the tenant’s residual. In recent years the tenant’s residual has received a lot of scrutiny. For more information on the methods listed, read Information File C2-20, Computing a Cropland Cash Rental Rate on calculating rental rates. A decision tool for analyzing the different methods is also available.
Tenant’s residual method
When people use the tenant’s residual method they need to look at the potential range of outcomes. The volatility in yields has increased as weather patterns have become more variable. The volatility in prices has increased with exports, new uses for commodities, increased production in other countries and more world trade. Government programs have helped to stabilize some of this volatility but not to the extent that we saw in previous Farm Bills
Costs of production
Two producers with similar costs of production can have significantly different gross revenues due to marketing, crop insurance and government payments. For recent trends in grain prices you can refer to Information File A2-11, Cash Corn and Soybean Prices which gives monthly prices for Iowa. The Season Average Price Calculator is another resource. The associated Decision Tool allows you to estimate future corn prices for the current crop year; just click on the calculator in the upper right corner of the screen to download the interactive spreadsheet. When adjusted for basis the CME Commodity Prices will give you an idea of what the market thinks future prices will be. At the CARD website, Daily Corn and Soybean Basis Maps for Iowa and the Midwest, you can look at the current basis or go back to previous dates to see how it changes over time.
Crop production budgets
Information File A1-20, Estimated Costs of Crop Production takes you to the various crop production budgets. These are the 2010 budgets but will be updated to estimate what 2011 budgets will be in the coming months. If you want to enter your own data and look at the combined economics of crop rotations go to Decision Tool, Crop Rotation Summary. In general seed and machinery costs still seem to be increasing. Fertilizer and drying costs will be tied to changes in energy costs. At this point, I would estimate that we will see small increases in the overall costs of production.
With the weather variability we will see significant differences between counties and even within counties when it comes to yields. Soil types, drainage and weather all impact yields.
Outlook for 2011
When you look at the CME Group grain prices for 2011 new crops it doesn’t seem to indicate a lot of volatility. Corn has a slightly positive carry and soybeans have a negative carry. At this point it looks like the costs of production will increase only slightly. The Farm Bill safety net, Average Crop Revenue Election (ACRE), looks to be continuing its downward trend of providing lower levels of revenue coverage. This program has fewer than 20 percent of the producers even participating. Next month’s Ag Decision Maker newsletter will have an article detailing reasons for the lack of sign-up in the ACRE program.
One common topic that comes up frequently deals with the issue of terminating leases. The Center for Agricultural Law and Taxation’s (CALT) leasing publication, Iowa Farm Leases - Legal, Economic, and Tax Considerations goes into detail on page 6 discussing the ways to terminate a lease. The article also addresses the issues of material participation, USDA payments, landlord liens and many other topics.
The CALT website also provides a list of New Iowa Legislation Impacting Rural Landowners and Agricultural Businesses (Effective July 1, 2010). There are a couple of new legal issues that may be of interest. They deal with work on drainage districts and who owns the above ground stover and residue.
House File 2458 also addresses the issue of mowing road ditches. The mowing of ditches is banned during the song bird nesting season with several exceptions. If your lease requires the ditches to be mowed you might want to make sure you are in compliance with the new law.
The resources listed above and more are available on the Ag Decision Maker 2010 Leasing page. Also included on this page is information on 2010 Iowa State University Extension Leasing Meetings.
Kelvin Leibold, extension farm management specialist 641-648-4850, email@example.com