USDA lowers yield projections for 2018 corn and soybeans

Now that harvest is complete, farm operators and non-farm landowners begin the task of negotiating annual land rental rates for the upcoming growing year. Roughly 60 to 70 percent of Upper Midwest cropland is under a land rental agreement, and most of those agreements are renegotiated annually. While some two- or three-year leases exist, they are more commonly used in rental agreements among family members. Given the variable crop yields in 2018, continued low grain market prices, as well as uncertainty surrounding trade, it could be a challenge to arrive at equitable land rental rate for 2019.

Altered landscape

In the past, land rental arrangements have been between farm operators and landlords who have known each other quite well; sometimes they are neighbors or family members. In recent years, however, land ownership has increasingly been transferred to family members or family trust located far from the land. Some land owners hire a land management company to represent them in land rental negotiations and many farm operators have limited experience working with these new landlords or those representing land owners. This can lead to challenges when negotiating annual land rental rates, especially during times when yields are variable.

Production results from 2018 were mixed in the Upper Midwest: some producers reported average or better corn and soybean yields, while others had some of their lowest crop yields in two decades. Some farmers in portions of southern Minnesota and northern Iowa had corn yields 10 to 20 percent above their 10-year crop insurance actual production history (APH) yields in 2016 and 2017, before having corn yields that were 10 to 20 percent or more below long-term average yields in 2018. This demonstrates why it is best to use the updated 10-year APH yields, or other verifiable historical yield data, to make yield projections for cash rental rate estimates for the coming year.

Cash corn prices have remained fairly low since 2016 and are not showing signs of significant improvement. Soybean prices had a brief rally in early 2018; however, prices dropped nearly $2 per bushel by mid-year following the Chinese tariffs on U.S. soybean imports. Currently, U.S. soybean exports to China are only a fraction of what they were a year ago. Up until 2018, China had been importing approximately one-third of annual U.S. soybean production. The estimated U.S. soybean carryover at the end of the 2018-19 marketing year (Aug. 31, 2019) is projected to exceed 1 billion bushels, which would be at the highest level ever recorded.

The USDA is currently projecting the national average soybean market price for the 2018-19 marketing year in a range of $7.60 to $9.60 per bushel, or an average of $8.60 per bushel. The USDA is estimating the national average corn price for the 2018-19 marketing year in a range of $3.20 to $4.00 per bushel, or an average of $3.60 per bushel. Forward price bids in southern Minnesota for fall  2019 are currently near $3.30 to $3.40 per bushel for corn near $8.25 to $8.50 per bushel for soybeans. Therefore, it is probably not realistic to base 2019 cash rental rates on projected prices of near $4.00 per bushel for corn and over $9.00 per bushel for soybeans, given the current fundamentals in the grain markets.

Managing the variables

Average crop input expenses for crop production in southern Minnesota, excluding land costs, declined somewhat in 2017 and 2018; expense estimates appear to be a bit higher for 2019, however, especially for fertilizer, fuel and repairs. Most farm operators will likely have higher costs for operating interest in 2019, as compared to previous years, due to higher interest rates and increasing levels of farm operating debt. Production costs are highly variable from farm-to-farm, depending on fertility level, availability of livestock manure, and farm operator efficiency.

The tight cash flow margins in crop production for the 2019 crop year are cause for concern as farm operators negotiate 2019 land rental rates. The tight (or even negative) profit margins for next year’s crop, are also a concern for ag lenders as they begin to re-finance crop producers. Some farm operators will need to do some serious evaluation before agreeing to pay higher land rental rates for 2019, which could potentially lead to large financial losses for their operation.

In many cases, landlords have lowered land rental rates due to the lower commodity prices and tighter cash flow margins. Now, landlords are wondering if they need to make further adjustments, especially considering the fact that real estate taxes on farmland are quite high in some areas. Demand for rented farmland has remained strong but, due to the continued low commodity prices, demand has begun to temper a bit.

One alternative for farm operators and landlords to consider for 2019 may be to enter into a “flexible cash rent agreement,” which sets a reasonable “base rental rate” based on average crop yields, typical production costs, and projected 2019 prices. A “flexible lease” would include provisions to increase the final annual rental rate in the event of exceptional crop yields and/or higher than anticipated crop prices in 2019. These final cash rent adjustments should be based on actual crop yields and/or crop market prices in the fall of 2019, with any rental rate adjustments occurring on the year’s final land rental payment. If the “base rental rate” is set higher than realistic breakeven levels for the farm operator, the flexible lease will not be effective to address the added financial risk.  

Kent Thiesse, Farm Management Analyst, has prepared an updated Information Sheet titled: “Flexible Lease Agreements for 2019.” To obtain a free copy, and other land rental information, contact Kent Thiesse.

Iowa State University has some good resources on flexible cash leases and written cash rental lease contracts, including sample cash rental contracts, which are available on its Ag Decision Maker website. Additionally, the University of Minnesota Extension has scheduled a series of land rental informational meetings for landlords and farm operators in December.

For additional information email Kent Thiesse, Farm Management Analyst and Senior Vice President, MinnStar Bank, Lake Crystal.  
To subscribe to BankWise for weekly Ag Lending News updates email Kristi Ploeger or call 651-789-3997.

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