Cash rent standoff: Prohibitive land costs

Cash rent standoff: Prohibitive land costs

Land costs and the risk of losing acres may be the most difficult challenges for farmers in 2016 (part one of four)

Editor's note: Check back this week for remaining installments of this four-part series, and find all links to each story here as they appear.

Aaron Combs is in no-man's-land.

He can't get early-order discounts on seed, and he can't lock in good fertilizer prices for next spring. Why? He has no idea how many acres he will be farming next year.

Related: Lower cash rents – but will it be enough?

"I don't know what's going to happen," says the 39-year-old farmer from Momence, Ill. "We're trying to plan for the future and grow the farm, but it's next to impossible. We were up to 1,100 acres, then had to give up 650 acres the last two years because it just didn't pencil out.

"I'm just not willing to pay 50% of my gross revenue to the landowner," says Momence, Ill., farmer Aaron Combs.

"Something's gotta give."

Combs and many others find themselves between a rock and a hard place this fall as low prices squeeze margins – and the outlook is no better for 2016.

When he says it just won't pencil out, he means it: An average corn yield of 165 bushels times $4 returns $660 gross revenue per acre. With input costs relatively flat – say, $500 for seed, fertilizer, fuel, labor and weed control – that leaves only $160 to cover land costs.

In north-central Illinois, that figure spells red ink this year.

"I called my largest landlord who purchased his farm two years ago and they still want a 3% return," he says. "I'm being transparent with my projected income for 2016, but I'm just not willing to pay 50% of my gross revenue to the landowner."

~~~PAGE_BREAK_HERE~~~

Combs is not alone. Keri Votruba walked away from high cash-rent land last year when he realized it just wouldn't cash flow.

The Hemingford, Neb., operator farms with his son in a diversified grain, alfalfa and cow-calf business. The land they let go was 900 acres of irrigated ground under second ownership, purchased two years ago by an absentee landowner. Votruba had leased it on a crop share basis from the prior owner for 14 years, but the new owner wanted a cash lease Votruba felt was too risky.

"He arrived at a price; I made a counter offer; and we ended up cordially saying no," he recalls. The owner asked for $200-an-acre cash rent, while Votruba offered $175 with a bonus of 25% of the gross over a 165-bushel-per-acre yield.

"So, if we had a good year, the landlord would have made more than $200 per acre," the Nebraska farmer notes.

The going cash rent for irrigated land in the area ranges from $175 to $250 per acre, with higher rents usually going for sugarbeets and potatoes. Votruba planned to grow corn on most of the land.

Related: Prepare for cash rent discussions

"We walked away from $200, because at the time, with our basis and corn prices at $3.65 locally, we would have lost $35 an acre right up front even at $175-per-acre rent," he says. "We also have a pumping cost close to $70 per acre to consider."


Expand your farm business skills at the Farm Futures Ag Finance Boot Camp, Jan. 20, 2016, and the Farm Futures Farm Business Summit, Jan. 21-22, 2016, in St. Louis.


See all entries in this series:
Cash rent standoff part one: Prohibitive land costs (current entry)
Cash rent standoff part two: Negotiating leases
Cash rent standoff part three: How will land values adjust?
Cash rent standoff part four: Farm lenders' action

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish