Stubborn cash rents and choices to be made

FarmMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

One of the many advantages to being Wells Fargo’s agricultural economist comes from having many smart teammates out in the field. It is valuable to get information straight from the decision makers without a middle man massaging the data. One of the things that I am consistently hearing is that cash rents have not been reduced by any significant amount. Farmers have tried to introduce more “flex rents” where they offer a reasonable base rent and an option of increased payments for better than normal yields and/or prices. In some cases, they have had success, but too many landlords reject this risk-sharing approach because there are still competing farmers willing to offer higher cash rents without inclusion of risk sharing.

Who are these farmers offering rents that don’t pencil out with the current prices? After all, the newspapers continue to write stories about farmers losing money with the low prices and trade troubles. I think too many of these farmers simply fail to make accounting and finance part of their business strategy, and they are burning up their families finances with their wishful thinking.

Another thing that always gets my attention is that no one seems to have a “bad” yield. I talk to farmers all over the country, and I only hear about 225+ bushel yields. It seems that everyone farms great ground, and that every acre is a winner in the national yield contest. Of course, central South Dakota doesn’t claim to have 225 bushel yields, but they have their equivalent which would be 170 bushel yields. The connection between overpriced cash rents and overestimated yields causes farmers to lose money every time.

In 2017, the USDA estimated that national yield was 177 bushels per acre. The current estimate for 2018 increased slightly to 179 bushels per acre. Clearly, too many farmers let the “best” yields showing up on their yield monitors color their thinking. The following histogram shows the distribution for county corn yields in 2017. There were more than 1,400 counties that grew corn in 2017, and it is true that the average was in the high 170 bushels per acre. However, the distribution clearly skews to the low end. Fewer than 15% of U.S. counties averaged 205 bushels or more per acre, and the vast majority of those counties are in states like Idaho, Washington, and Georgia and on a limited number of irrigated acres. Some states like Iowa and Illinois have a number of counties that averaged 205+ acres, with a large number of acres hitting those yields. However, there are more than twice as many counties spread throughout the country that had an average of 165 bushels or less.

Average corn revenue for countrySource: USDA, Wells Fargo

It costs almost as much to farm a subpar acre as an above-average acre. About the only inputs that farmers can reduce for low yielding ground is the number of seeds planted and amount of fertilizer applied. While these two reduced inputs save costs, they also cap how much yield farmers can get if the conditions turn out to be above average that year.

Farmers targeting the national average yield of 180 bushels per acre will have to spend about $500 per acre on inputs and overhead. So how much does that leave for cash rents? The answer is not as much as the market is demanding, and the competition is paying.

The below histogram takes into account the county yield and that state’s average corn price for 2017. Once again, it skews heavily to the low end. There are way more “under-performers” than “out-performers”. Looking at the data and talking to our agricultural bankers, another problem rears its head for high cash rent. Bad cash prices seem to take a toll on some of the high-yield counties. Those counties have above-average yields and below-average cash prices. The local grain buyers can offer below-average cash bids because there is so much corn to be sold by the farmers. Additionally, many of these high yielding counties are not situated on the rivers and are not benefitting from stronger transportation options.

Average corn revenue for countrySource: USDA, Wells Fargo

If it costs $500 per acre to get 180 bushel-per-acre corn in and out of the field excluding land payments, the majority of counties in the U.S. should have cash rents of $125 per acre or less. Many of them don’t even generate positive cash flow implying cash rents of zero. Instead, I hear about $200+ cash rents per acre all over the Midwest, and throughout the country. Too often, I calculate that farmers are giving up more than 40% of their expected yield in cash rent, and this leaves too little yield leftover to recover their other costs.

So, what will fix this imbalance between the reality of true yields and cash rents? The most irrational competitors need to exit farming. Unfortunately, too often, the irrational farmers own enough acres to subsidize their irrational behavior. This allows them to push the envelope longer than seems reasonable. If everyone cash rented all of their acres, the market would come to a more reasonable price sooner rather than later. However, the reality of the mixture of owned and rented acres will allow this cash rent problem to drag on. The smart operators will need to say no to cash rents that don’t add to their bottom line, even if that means shrinking their operations. Saying no will ensure stronger balance sheets for the future.