Cash Rent’s Share of Expected Revenue
In recent months, we’ve found ourselves fielding several questions about cash rental rates and crop budgets. After a run of high commodity prices and rising rental rates, the recent drop in corn prices makes renegotiating cash rental rates and updated crop budget projections critically important. With this in mind, we are reviewing cash rent’s share in crop budgets.
Cash Rents and Expected Revenue
Figure 1 shows cash rental expense as a percentage of budgeted crop revenue. The underlying data are derived from the Purdue University budget estimates and assume a 50:50 crop rotation on high-quality Indiana farmland. Since 1991, cash rents have accounted for an average of 35% of budgeted revenue. Since the underlying revenue is a weighted average, rents would be a lower share in corn enterprise budgets and higher in soybean enterprise budgets.
While the average of 35% is easy to remember, very few observations have hit that mark. In the late 1990s and early 2000s, cash rents ranged between 40% and 45% of expected revenues. When commodity prices increased throughout the late 2000s and early 2010s, the share fell and was frequently below 30%.
More recently, cash rents again topped 40% during the Margin Squeeze (2015 & 2016) and at the tail-end of the trade war (2020). However, the jump in commodity prices and expected revenue have outpaced higher cash rents, and the ratio fell to 27% in 2022. For 2023 budgets, which included an assumption of $5.25 corn and $12.40 soybeans, the ratio turned higher to 32%.
When the ratio is well below the average, say 30%, we’d expect upward pressures on cash rental rates. On the other hand, when the measure exceeds 40%, producers will be focused on holding rents unchanged or adjusting lower.
Wrapping It Up
Cash rental rates are challenging to manage during periods of significant swings in commodity prices. While the 35% rule of thumb is simple, reality isn’t as clear-cut. Expectations about revenue – commodity prices and yields – are also important. As Brent wrote in the spring, it’s anybody’s guess as to what will be normal or typical corn prices between, say, 2025 and 2030.