Policy center analysis U.S. cash rents: what the future holds

Producer panels are of utmost importance when the Agricultural and Food Policy Center gathers data for Congress to use during agriculture policy construction. The politicians use the information to determine the impact on real farmers of continuing the current farm bill versus alternative policies.

In recent years, the panels, drawn from representative farms all over the nation, have been used to track changes in cash rent. Economist James Richardson, co-director of the Texas-based Agricultural and Food Policy Center (www.afpc.tamu.edu), said the cash rent trends are a mixed bag, depending on a farm's location.

“Corn prices have been around $4 since 2007 and will remain around that price through 2016,” Richardson said at the recent American Society of Farm Managers and Rural Appraisers annual meeting in San Antonio, Texas.

For that same period, estimates are “the soybean price will range between $6 and $10. Wheat will remain between $5.50 and $6.50.”

For the cash-rent study, cotton farms in California, Arkansas, North Carolina and Alabama were selected along with a Kansas wheat farm and grain farms in Iowa, Indiana, Missouri and North Dakota. All can be described as “typical” for their area (table 1.)

“These farms are large commercial operations. They grow the typical crop mix under typical management with common soil fertility. We aren't trying to mix dryland farms in with strictly irrigated operations. We've tried to make them as homogeneous as possible.”

Most of the operations depend fairly heavily on cash-rented land. The Iowa farm was cash-renting 75 percent of the land it actually rented. The same was true in Indiana. Missouri was at about 10 percent.

The panels normally meet every two years to update data — “what cash rents are doing, what land value has done, the new crop mix, cost of production — and that's used when we're analyzing policy options for Congress. They've given us a list of reasons for why they're seeing more cash rents.”

Among them:

  • Absentee landownership on the rise.
  • To simplify rental arrangements.
  • Eliminates landowners' cash flow requirements for sharing input costs.
  • Landowners are afraid of price risk.
  • Landowner payment limitations in the 2008 farm bill (AGI limitations in the means test and landowners' off-farm income).

After reviewing the numbers in the accompanying table 2, “you can see a substantial increase in the cash rental rates in different parts of the country.”

The 2007-08 $187 rate in Webster County, Iowa, was a $37 increase over 2004 through 2006. That was the average rental rate the panel was paying.

In Arkansas cotton, “it used to be there was rarely any cash rent. Now, it's up to $140 per acre. California didn't change.”

Another reason for cash rent is to avoid some of the payment limitation issues, said Richardson. Now, payments will be under direct attribution.

“If you're a businessperson who owns farmland and also has a large off-farm income — say, $750,000 adjusted gross income — you won't be eligible for any direct countercyclical or ACRE payments, at all. The way landowners can get around that is for renters to pay cash rent. And in that cash rent number, the landowner receives his/her share of the expected value of direct payments. That's one reason cash rents have risen and become more prevalent.”

The Agricultural and Food Policy Center also projected what the effect would be on farmers' ending cash reserves in 2013 if cash rents were increased or decreased (table 3).

By reducing rent 10 percent, “the Iowa farm would have 13.6 percent more ending cash in 2013 than if there was no change in the cash rents. It turns out ending cash reserves are pretty sensitive to what the cash rent is — especially on this Iowa farm where they're cash renting 75 percent of the rental land they have.”

If the farm's cash rent is decreased 20 percent, the increase in ending cash is almost 27 percent.

If the cash rent is increased 10 percent, “it would hurt the Iowa farm by reducing ending cash by almost 14 percent. Increasing the cash rent 50 percent causes their ending cash reserves would drop 72.6 percent.”

Richardson said it's interesting that the Arkansas farm would “have small effects (by cutting or increasing cash rent) because they're only using cash rent on 5 percent of the land they're renting.”

It also turns out Kansas wheat is very sensitive to increases in cash rent. “Increase it by 20 percent and they'd have 18.7 percent less ending cash.”

Richardson and colleagues also looked at the probability that ending cash reserves in 2013 would be negative (table 4).

“That would be bad from any farmer's standpoint. If a farmer ends the year with a negative balance, he has to ask the bank to extend operating loans. That hurts credit reputations and, next year, he'll have to pay that loan back with interest so cash flow will be adversely impacted.”

They took the same scenario and calculated — “using a large farm simulation model that includes crop price risk and yield risk” — 500 different price and yield risks along with 500 weather and price scenarios.

At the end of 2013, “the probability for the Iowa farm having a negative cash reserve is 9 percent if cash rent increases 10 percent. That means if the farmer wants to bid 10 percent more for his rent, there's only a 9 percent chance his ending cash will be negative in 2013.”

In the base situation, “the Iowa farm already has a 5 percent chance of that. So, there's only a small increase in the possibility of a deficit. Maybe I'd bid cash rent up by $37.50. Doing that would only increase my deficit from 5 percent up to 9 percent.

“That's why I conclude there's wiggle room in the Midwest. At the price projections we used, they have only small disincentives to pay more for cash rent. If prices drop lower than projected, the penalty for bidding land up 20 percent will be much larger.”

There are also only small disincentives for Missouri and North Dakota grain farms to bid up cash rent.

However, in cotton-growing regions like Arkansas, Alabama and North Carolina there are huge disincentives. That's because “you're already at a high probability of a cash-flow deficit and any additional increases in cash rent will hurt much worse.

“Cotton is a high-input cost crop because of the fertilizer and chemicals used. The cost of growing cotton is significantly higher than for growing corn. Pull up an Extension cotton budget for Texas or Mississippi and put it next to one for corn. The numbers are completely different.”

Meanwhile, in California cotton, shifting cash rent “doesn't really matter. A farmer there would increase the probability of negative ending cash from 5 percent to 9 percent or 14 percent.”

At 17 percent base probability of a cash deficit, “Kansas wheat is also very sensitive to any increase in cash rent. 17 percent is already pushing the operation to a shaky position. Our rule of thumb is if the probability stays under 25 percent, you're in a good financial position. If it goes over 25 percent, you're in a marginal position. At over 50 percent, you're in a poor position.

“So, if the northwest Kansas cash rent is increased 20 percent, probability of a deficit increases from 17 percent to 21 percent. At 21 percent, the farmer needs to think seriously before bidding up cash rents.”

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