Sinking crop prices have some farm operators pondering whether they will be able to pay cash rents they committed to pay when crop price prospects were higher.
Deadlines to terminate cash leases in many states have already passed. Still, by mutual agreement, owners and operators can adjust rental rates at any time. The key is mutual agreement.
The objective of a crop lease is to divide the returns from crop production in the same proportion as the players contribute resources to produce the crop. Yields times prices determine gross revenue. Subtracting other costs leaves profit plus return to land as a residual. The objective is to share that residual equitably among the players.
“Cash rents are likely to be too low during periods of rising prices and high yields and too high during periods of declining prices and low yields,” notes Iowa State University economist William Edwards. “Rates often reflect the results of the past few years more than the upcoming year.”
Some financial advisors suggest building a cash flow cushion of 15% of gross revenue into your planning. One approach is to calculate the cash rent that would breakeven. Then reduce that amount by 15% of gross revenue to get a bid.
Might a 15% reserve be too much? For insight, USDA projects the 2013-14 corn marketing year average farm price in the $4.05 to $4.75 range. The midpoint is $4.40, down $2.49 or 36% from the $6.89 average for 2012-13.
Granted, 2013 yields are higher than 2012, but 2013 crop insurance payments are also likely lower. A 15% cushion might not be enough.
We're featuring the spreadsheet as our Farm Futures spreadsheet-of-the-month. You can download it by clicking on the link below.
Do you have a spreadsheet that's made a difference on your operation that you'd be willing to share with with other readers? Drop us a line at [email protected] with a description of the spreadsheet. We'll pay $75 if we feature your farmer-written noncommercial program as our Spreadsheet of the Month.