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"Leases that allow rents to adjust or cash leases with short
lease periods are appropriate in times of price uncertainty,"
said Gary Schnitkey. "Moreover, long-run increases in commodity
prices do not automatically translate into farmers having
long-run higher returns or risk reductions." Schnitkey and
colleague Dale Lattz prepared the report
"Are Increasing Cash Rents Justified?" which is available on
U of I Extension's Farmdoc website.
Verbal reports indicate that 2007 cash rents on some land
tracts are increasing over 2006 levels. Portions of these
increases likely result from projections of higher commodity
prices, Schnitkey noted.
"While futures contracts do suggest higher prices, there is
considerable uncertainty whether the high prices actually will
occur and whether they are sustainable," he said.
The report discusses historical precedents for the current
situation. Both corn and soybean prices increased and reached
higher plateaus in the early 1970s but later demonstrated
considerable variability. The report was prepared using data
from the Illinois Farm Business Farm Management Association,
which involves 6,000-plus farmers throughout the state.
"Currently, there is a reasonable possibility that corn and
soybean prices will be considerably higher than historical
averages," he said. "Futures prices suggest that cash prices
could average $3.20 for corn and $6.90 for soybeans over the
next several years. Much of this increase is attributed to
increased demand for corn in ethanol production.
"Good arguments can be made that biofuel uses may result in
permanently higher prices, similar to the situation in the early
1970s. Conversely, it is also possible that crop production
increases or reduced demands could result in commodity prices
nearer historical levels."
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Before the prospects of ethanol production caused an increase in
expected prices, profitability of crop production in 2006 and 2007
was expected to be near average to slightly below average, due to
cost increases.
"Hence, commodity price increases were needed to maintain
historic return levels," he said.
Schnitkey and Lattz made two recommendations in their study.
First, use of lease arrangements that allow payments to landlords
to adjust to return situations seems warranted. These arrangements
allow landowners to share in higher returns if higher commodity
prices actually occur in the next several years.
"If higher prices do not occur, payments to landowners are
maintained at manageable levels," said Schnitkey. "Lease
arrangements in this category include share-rent, share-rent with
supplemental payments and adjustable cash rent leases."
Second, increasing cash rents on the prospect of higher commodity
prices should be undertaken with caution.
"If rents are increased as a result of commodity prices, the
length of the lease should be kept short, perhaps only a year in
length," said Schnitkey. "Higher prices have a reasonable prospect
of occurring in 2007. Higher prices in 2008 and beyond are less
certain."
[University
of Illinois Extension news release] |
