By Pauline Van Nurden, University of Minnesota
Farmers have begun pushing the pencil on profitability expectations for the upcoming year. And the outlook is challenging – especially on rented acres. Expenses look to be the same and revenue is down considerably (26% or more for corn, soybeans, and wheat). There will be no easy answer when planning for the 2016 crop year.
As producers make crop input decisions and work on land rent negotiations for the coming year, many options may come to mind to help their bottom line. A natural goal is to decrease expenses. But, these expense cuts cannot jeopardize the yield potential of the crop. Therefore, it is likely difficult to trim much off of seed, fertilizer, or chemical expenses.
The other major crop expense is land rent. According to the FINBIN Database, land rent has been increasing at an average rate of 9% per year over the last 10 years on both corn and soybean acres across all of Minnesota. This may be an area where expenses can be reduced. Producers will need to have a frank discussion with their landlord about the current farm economy. This open conversation may help negotiate a lower rent cost for the coming year. But remember, landlords have also experienced rapidly increasing costs. Real estate taxes, one of their major costs, have risen at an average of 10% per year over the last 10 years as well.
What if no solution is available and a farmer is facing a large loss on rented acres for the 2016 year? Farmer’s may wonder if it is time to walk away from rented acres. This is truly a difficult decision. As this decision is contemplated a few items to consider include:
- Are Direct Expenses on these acres covered? Direct expenses include all of the costs tied directly to crop production, such as seed, fertilizer, chemicals, fuel, and rent. (Direct costs would not be incurred if the land was not farmed.) If the farm is unable to generate enough revenue to cover these costs directly associated with producing the crop, then the farm is producing at a loss and will be risking its financial future. If the farm has a positive return over direct expenses, then the rented acres are generating some contribution to overhead expenses. (Overhead expenses are those expenses not directly tied to production and do not go away, such as machinery costs and general farm insurance.) If even a portion of overhead costs can be covered by the rented acres, then the farm is better off renting the acres in the short term to help weather this financial storm.
- What is the Land Quality versus the Rental Rate? If the farm is historically a poorer yielding farm because of lower quality soils, lower fertility, or drainage issues then it may be easier to walk away from these acres – especially if the rental rate on these acres is relatively high. When the probability of exceptional yields is tarnished because of lower quality land, then it very well could be the right decision to forego those acres.
- What is the financial position of the farm? When an operation has limited working capital reserves it is difficult to survive a year of negative profitability. Using working capital reserves at this time can help producers maintain land base, even if they are farming at a loss, in hopes (and probability) of improved profitability down the road. The key is for a farm to not “burn” through all of its working capital and make proper management decisions at this time to ensure the operation is viable into the future.
- Is there some way to replace the income lost if the land is not leased? Walking way from rented acres will often free up labor to do something else. Even if the rented land will cover direct expenses and some overhead expenses, is there a way to use your labor to generate more income?
These are just a few of the factors that play in to the decision process of giving up land. The decision is complicated by the fact that finances are not the only consideration. When land is given up, there is a low likelihood those acres will again be available to the farm in the future. Also, replacing those acres with different rented acres is challenging as well, either now or in the future. Finally, budget outlooks can change quickly with weather and price volatility. Farmers have an optimistic outlook and typically feel the future will provide opportunities. These items all make a decision regarding giving up rented acres complicated.
Each operation will have its own answer to this difficult decision. One option might be to consider a flexible cash lease (see Aglease101.Org). FairRent is a free online tool that can help producers evaluate the profit produced by rented acres (FairRent.umn.edu). It is always advised to work with a professional as considerations like these are made – make sure to analyze the cash flow projections, consider the effects on the operation’s bottom line, and evaluate all the factors that play into the decision. Often times the tough decision is the right decision for the future viability of the operation.
Source:umn.edu