Leasing issues and rental rates for 2012
In May’s Ag Decision Maker newsletter, an article reviewed the 2011 leasing rental rates. The article provided highlights from Information File C2-10, 2011 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 such as ethanol, increased production in other countries and more world trade. Government programs, including crop insurance, have helped to stabilize some of this volatility but not to the extent that we saw in previous Farm Bills. Revenues can change by hundreds of dollars per acre in a matter of a few days.
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 (http://www.cmegroup.com/trading/agricultural/)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 2011 budgets but will be updated to estimate what 2012 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.
The costs to watch in the coming season include seeds, fertilizers and machinery costs. Higher grain prices will allow the seed industry to increase seed costs and technology fees. The fertilizer industry is seeing increased worldwide demand with some governments subsidizing the cost to their domestic farmers. Some Iowa farmers have been “booking” fall fertilizer already and paying 20 percent or more down to lock in a price and a guaranteed supply. Several of the major machinery manufacturers are running at full capacity and they have faced increased costs for steel and tires along with new environmental regulations for engine emissions. This, along with higher fuel prices, is driving up machinery costs.
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 2012
When you look at the CME Group grain prices for 2012 new crops you see an interesting scenario. Corn currently has a negative carry. New crop corn started out at $4 per bushel and went as high as $7.20 a bushel and has retreated a $1 a bushel to around $6.20. We can easily see a $1 swing in the price of corn which may change the gross revenue by as much as $200 per acre in a matter of days. Soybeans currently have a slight negative carry. The 2012 new crop soybeans prices on the Chicago Board started out around $15, then dropped to below $9 and then moved higher into the $14 range and now sit around $13.25. We’ve seen the Board price move over $1 range within two trading days to illustrate the volatility in the market. Keep in mind that normally Iowa prices are lower than Chicago prices.
At this point it looks like the costs of production may increase around $75 per acre. The Farm Bill safety net, Average Crop Revenue Election (ACRE), will provide a higher level of revenue coverage than in the past, but will still be below levels producers will find acceptable. This program currently has less than 15 percent of the producers participating.
With the current high grain prices there is very little safety net in the traditional programs such as Loan Deficiency Payments and Counter Cyclical Payments. Corn prices, for example, would have to drop by half before any of these payments would kick in. The new Farm Bill will probably reduce or eliminate Direct Payments after 2012 as well. The only real safety net at this time is crop revenue insurance at high levels. If the grain prices in February of 2012 are lower, then the safety net will also be much lower.
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. AgDM File C2-19 shows an example form for terminating a lease.
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 2011 Leasing page. Also included on this page is information on the 2011 Iowa State University Extension leasing meetings being held in July and August.
Kelvin Leibold, extension farm management specialist 641-648-4850, firstname.lastname@example.org