Making Long-Term Cash Rent Decisions Using Purdue Agriculture's Cash Rent Decision Tool
11 January 2016
One of the biggest challenges that a farmer is faced with in Agriculture is cash rent dilemma. The dilemma is a long run perspective. With challenges including downturn in net returns for corn and soybeans and landowners reluctant to reduce cash rents.
That’s when you need to ask yourself: if you expect to lose money in 2016 on a tract of rented land, should you continue to rent the tract? Also how much of a premium can you pay to retain control of a tract until net return prospects improve? And finally, how does paying a premium affect your farm’s liquidity? Your premium is equal to the market cash rent minus the breakeven cash rent. This is an issue that will occur for the next several years. You also need to look at your working capital at the beginning of the year. The focus is on cash rent premiums and liquidity. In a webinar from Purdue's Center for Commercial Agriculture has come up with a helpful tool to calculate long term cash rent.
The tool which is a spreadsheet allows you to compute very clearly what your premium is and how that would impact your liquidity. To help you get the correct results you will need to input your net returns and working capital. To get to that you need to start with cost budgets and be very accurate what your costs are. You also need to enter your revenue and prices. The spreadsheet is set up for Indiana and Illinois budget farms and also has built in scenarios for cost budgets. It’s very critical to know your local market. It also allows you to look at your working capital changes over time. You can download the excel spreadsheet tool here.
Finally, the spreadsheet helps land owners make people that you’re working with better aware of how much the economics of agriculture have changed this past couple years. If you think about renewing a lease on a tract of land that you currently have or think about bidding on a tract of land that might be coming up for rent in your community, Purdue's Center for Commercial Agriculture urges you to think about the long run impact on your operation.