Crop Production Costs and Cash Rent

The most basic farm management tool is a crop budget. I use budgets almost daily to help advise owners and operators for a variety of business decisions. The best budgets depict actual costs for a specific cropping situation. In the absence of actual costs, estimates from MU Extension budgets can be useful.

Current cost estimates per acre and per bushel are shown in the table. In summary, overall operating costs are projected slightly lower for 2016 due to the outlook for fertilizer and fuel prices, but are still at historically high levels. In particular costs of pest control continue to increase.

An important use of a crop budget is to estimate the expected return after expenses. The numbers show tight margins and point out the pinch farmers are feeling.

Compare expected market prices on line A with costs per bushel on lines B and C. The current outlook shows that the market is expected to offer prices that cover operating (or variable) costs, but fall short of the total costs of production. On owned land there is an economic incentive to plant and target high yields in an attempt to recover at least a portion of the machinery and land ownership costs.

However, on rented ground where land is effectively a cash operating cost the incentive for the farmer is different. See line D where the real estate charge ($140 for dryland corn and soybeans) is including in operating costs rather than ownership costs. For the cash rent tenant the market price falls short of even the operating costs. The implication is that based on current knowledge many farmers will likely experience a net negative return in 2016. The only economic incentive to farm rented ground is to retain rights in hopes this year or future years will generate more net income than currently projected.

It seems to be human nature to let history unduly color our view of what will happen in the future. However, both owners and operators negotiating cash rental rates are best served by looking forward to the most likely returns. It is a mistake to set rental rates based on the boom years that are getting farther behind us or unrealistic expectations.

Contact your Ag Business Specialist for assistance with leasing arrangements or estimating costs of production for your farm.

Source: Brent Carpenter, Ag Business Specialist