Does $500 cash rent pay?
A new crop of Midwest cash rent auctions resulted in many $500-an-acre deals for 2012, leaving bystanders wondering how their neighbors can make top-dollar rent pay.
It was definitely easier for an above-average corn grower to shoulder extreme rent in 2011 than 2012, according to financial adviser Sam Bachman with AgriSolutions, a Brighton, IL, financial consulting firm. That’s especially true if USDA’s projected 2012 average cash price plunges to $5 this season and input costs stay steady or higher, squeezing growers’ margins.
Take a real 1,252-acre corn grower from northern Illinois who paid an average of $237 an acre for rent last year, boasted an average corn yield of 171 bushels, and who averaged sales of $6.23 a bushel, based on AgriSolutions’ field-level managerial accounting records. His production margin before rent ran $512 an acre in 2011. (Production margin is the profit margin before family living, taxes and interest on debt.)
In theory, that $512 was the maximum aggressive rent the grower could have afforded to pay on any extra acres he rented and still cover all his variable expenses in 2011, Bachman says. “At your most aggressive, you could let your existing fields cover your overhead (they would have had to anyway). Then let your new field cover variable costs including seed, chemical, fertilizer, crop insurance, equipment operating costs, storage and drying costs and other general crop expenses.” You’d also have to determine if you had capacity for one more field (time, energy, management ability and equipment).
“Other businesses do that all the time to penetrate a new market and get their foot in the door with a new customer,” but it can be a risky strategy in farming, adds Bachman. “You have to hope that by the time the lease is up, you’ve built a relationship with the landowner that isn’t solely based on dollars.” Over time, you’d need rents to adjust closer to your average to cover all your costs.
One risk is that a sudden drop in commodity prices could derail the best intentions. All other things being equal, the real Illinois grower’s “maximum” affordable rent on expansion acres would slide to $316 an acre if his average corn price is $5 in 2012 instead of $6.23, Bachman says. Unlike 2011, that more conservative corn price leaves renters little margin for error.
Bachman’s bottom line: “With the price and yield risk, $500 rents are extremely aggressive and likely not sustainable even for those operators with excess capacity.” — Marcia Taylor, DTN