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Who will take coming farm profit losses?

Volatile markets may lead land owners, tenants to share income losses

August 18, 2013
By LARRY KERSHNER, kersh@farm-news.com , Messenger News

A volatile grain market, the possible loss of direct payment government subsidies and a decline in farm land values are some of the future pressures facing Iowa farmers.

At a farmland leasing workshop in Fort Dodge on Thursday, land owners were questioned if they were willing to bear some of those losses along with their tenants.

Kelvin Leibold, an Iowa State University Extension farm management specialist, repeatedly asked landowners who were among the 41 in the audience if they were prepared to share the loss of revenues as farming's boom years appear to be on the decline.

Article Photos

-Messenger photo by?Larry Kershner
JAN GRELL, a land owner from Ida County, pores over a workbook Thursday during a farmland leasing workshop at the Webster County Extension office in Fort Ddge. She was one of 41 who attended.

"If profits start to disappear then rents will have to start to downsize," Leibold said in an interview following the meeting.

Thirty years ago, Leibold said, said, 100 percent of the landlords paid for half the price of the seed and the fertilizer. Today, fewer landlords are sharing those costs.

Jan Grell, a landowner from Ida County, said she found the meeting informative for her future leae contracts. She declined comment on whether she'll offer contract changes for 2014.

Gary Eichelberger, of Manson, said he also found the information useful, since he sees the both sides. He rents land and also helps manage a farm, working through contracts with tenants.

Crops' impact on leases

Noting the 2012 drought and its devastation on Iowa yields, Leibold asked a table of women, "So how'd it work out for you landladies? You didn't lower your rents at all, so apparently a drought is a good thing.

"Because given the choice of high yields or high prices, we'll pick high prices, because we'll make up the yield in crop insurance."

Following the droughty months, Leibold said many producers signed up for the federal Average Crop Revenue Election program.

ACRE is a farm support program designed to look at yield and price. Producers may receive revenue-based payments as an alternative to receiving price-based, counter-cyclical payments.

"If we have a great corn crop east of the Mississippi," Leibold said, "and Iowa has a drought, and there's a great corn crop west of the Missouri because of irrigation, we'll have low prices and low yields in Iowa.

"(Iowa farmers) should be able to collect on ACRE.

"So wet springs aren't as good as droughts, especially if the drought is in the neighbor's backyard and not in your own."

On Aug. 13, the U.S. Drought Monitor showed that 29 Iowa counties in west central and central Iowa, are in moderate drought conditions.

"We've actually seen an increase in prices out there," he said, "because of dry weather. There are some spots where the crop is really deteriorating."

The U.S. Department of Agriculture crop condition report, released Aug. 11, said there were 4 million U.S. acres of corn and soybeans that didn't get planted this year. The same report rated less than 50 percent of the nation's corn and soybean crop as good to excellent.

The report said Iowa corn is just 86 percent tasseled as of Aug. 11; normally it's at 100 percent. Corn silking was at 75 percent.

Leibold said the numbers show Iowa's corn is in trouble. The days to reach full maturity are too many before the first frost.

The same report said just 43 percent of Iowa's soybeans were setting pods as of Aug. 11, which is normally at 80 percent.

"So we have some bean acres that aren't going to get combined," he said.

Prevented planting

Although there are still no government reports on unplanted acres per county, Leibold said Winnebago County had 20 percent of its corn acres not planted and estimated another 15 percent won't get harvested.

The types of crop insurance and level of protection in individual policies was the driver on most decisions to not plant this season, Leibold said.

Other decisions were based on protecting a farm's Actual Production History, a 10-year average of yields in which crop insurance protection is based upon.

Especially since most yields were whittled during 2012's drought, Leibold said, "You don't want two bad years in a row, so you try to mitigate that by declaring prevented planting."

Prevented planting acres are not counted in the APH.

With crop insurance protection, Leibold said, a farmer can still make a little money by not planting.

"It's not a get-rich program," he said, "but it's 'don't let the boat sink.'" Prevented planting maintains the high APH for future years, while the producer generates the cash flow to make rent payments.

Direct payments

Leibold asked his audience if direct payments go in the pockets of tenants or landlords.

"The law says the operator gets the direct payment," he said, "but that's not the truth. The landlord gets the payment."

"So you are being subsidized by direct payments," he said. "How do you feel about that? You think it's OK, right?"

He said direct payments subsidies are tied to the land, not the crop, if any, on them.

"So the tenant takes that money and bids the land rents up with it," he said. "Works pretty good for you, doesn't it?"

But the 2012 farm bill was designed to cut direct payments. It failed and the 2007 farm bill was extended another year, which ends on Dec. 31.

With the nation's debt-to-gross-national-product ratio at 102 percent, Leibold said, farmers and landlords can expect those subsidies to be eliminated.

"Since these direct payments go to landlords in higher rent," Leibold said, "then landlords should reduce rents if those payments go away next year."

Average rent trends

Since government programs will not cover losses until corn falls under $2.50 bushel, Leibold reminded the audience, "we have a long free fall from $7 to $2.50, without crop insurance because it's only good for one year."

In recent years, profits have grown. Even if landlords didn't get a bigger percentage of the profits, rental income dollars grew.

If the farm bill eliminates any government payments, the pie gets smaller, Leibold said, "but landlords are not looking to reduce rates."

He said he believes that in a crop-share arrangement landlords should have 32 percent of the corn crop and 42 percent of the soybean crop.

Future impacts on rents include:

Discounting rents on smaller fields, since planting equipment is getting bigger, then smaller, irregular-shaped fields pose more difficulty to farmers.

Seed corn contracts can drive up rents.

Money saved on spreading manure rather than chemical fertilizer is a cost savings generally passed onto landowners through bidding higher rental rates.

Grain prices in 2014. Leibold said he foresees even more acres being planted to corn and soybeans in 2014, with less wheat and cotton in the U.S.

He worried about ethanol, due to decreasing demand for gasoline and the Renewable Fuels Standard mandating more production.

But in the long run, Leibold said, "Supply and demand will set the rental rates. It's the guy down the road that makes the difference."

Losses looming

The futures market on corn and soybeans are not positive. These commodity prices are falling quickly.

As an example, he said, on Aug. 1 cash corn in Iowa Falls was $5.82, while August futures closed at $4.87, for a plus 95-cent basis.

October cash corn was at $4.32, with October futures at $4.67, for a plus-35-cent basis, a slippage of 60 cents per bushel.

But October 2014 cash corn is set at $4.48, while futures trading was at $4.98, with a minus-50-cent basis, more than a dollar per bushel less.

"Who's going to make up that loss?" Leibold asked the landlords. "You didn't want to give up the direct payment subsidy, you interested in buying any of this loss?"

When his question was answered with silence, Leibold said, "Hey, don't kill the messenger."

He said if landlords are not willing to reduce rental rates, then the difference either has to come from the inputs industry or producers' pocket.

 
 

 

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