This is the time of year for negotiating cash rental agreements for farmland and there is going to be a potential problem for 2020.
Lower than normal yields this year have created lower than normal income on farms, and the financial resources needed to meet landowner demands for higher rent will not be available.
But wait, maybe they are! Yes, the U.S. Department of Agriculture has been handing out billions of dollars in payments known as Market Facilitation Program (MFP) payments, to replace the loss of higher commodity prices from export sales to China.
Land owners are certainly aware that farm operators are flush with cash, and capable of sharing some of that USDA largess and paying higher cash rents for 2020. After all, farm income is now being provided at the direction of the White House, not necessarily received from the marketplace.
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And that creates a serious problem for University of Illinois farm management specialist Gary Schnitkey, who is concerned that farmers will make cash rent promises to land owners and the money will not be there when the rent is due. Schnitkey has worked through farm income projections for this year and next and found some serious financial pitfalls.
He says farm profitability will be dependent on the financial handouts from Washington, and if farmers do not get any during the 2020 cropping season, they will be operating in the red and unable to pay even average levels of cash rent. In his terms, Schnitkey says, “Without an MFP payment, 2019 returns are estimated at -$83 per acre, the lowest farmer return since 2000. Positive returns in 2020 may be dependent on some level of support, such as the continuation of the MFP.”
The Schnitkey solution calls for farm operators and land owners to agree to a rental rate that does not rely upon any government payment, because there is no certainty that such payments will continue at all. He says an appropriate approach would be to set a cash rent without the MFP considered in budgeting and allowing for an increase in the rent if the MFP payments continue.
But that is assuming more than the land owner may want to agree. With those multi-billions of USDA dollars being showered upon the landscape, everyone wants a share. But there is not even a guarantee that farmers will receive all the money that was set aside in Washington for the payments for 2019. Two of three planned payments have been made with the third potentially to be distributed in January, if China remains out of the soybean and pork market.
If the so-called “phase one” trade agreement is consummated in December as negotiators are planning, that would likely preclude the USDA’s scheduled distribution of the remaining 25% of the MFP funds. And if the well goes dry, farm operators may have funds to make an initial 50% cash rent payment before the farming season begins, but not at the end of the 2020 season, if commodity prices do not reflect restoration of Chinese commodity purchases.
Stu Ellis is an observer of the Central Illinois agriculture scene. In addition to his weekly column, you can view his “From The Farm” and “Harvest Heritage” reports on WCIA 3 News.