Farmland Owners – Bad, More Bad, and Worst

Jim Pease, Professor, Agricultural and Applied Economics, Virginia Tech

The deadline for farmland owners to register program base acre reallocation and payment yield update decisions with USDA/Farm Service Agency is March 31, 2015. Many landowners will not understand the choices or will not make the effort to work with the cash tenant. “So why should I care – the payments all go to the cash tenant, not me.” True, but shortsighted. The rental rate and market value of farmland are based partly on the farm’s potential to generate commodity payments. If base reallocation and payment yield choices are not made, the value of the farmland may well be reduced.

For absentee farmland owners, it’s hard to believe that the agricultural prices are tanking, the farm economy is rapidly headed south, and that their tenants are in serious financial trouble. Wasn’t it just a year or two ago that farmers were pulling in the highest prices in modern history? Weren’t farmers making money hand over fist, and willing to share some of the bounty with landowners? Well, take a look at expected returns to US farm operators forecast for 2014 and 2015.

CaptureAfter declining by 18.5% in 2014, USDA has forecast a devastating 36.1% year-to-year drop in return to operators in 2015. The boom in commodity prices is over. See below the historical and forecast US corn prices in the recent past and projected through 2018.

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After rising to very high levels in 2009-2012, the US corn market is presenting a very bleak outlook through 2018. Corn is just an example of the field crops typically grown by Virginia farmers, but except for soybeans, which continue to be powered by export demand, all the major field crops have the same poor price outlook for the next several years.

The financial stress that will be placed on farmers is likely to be very serious. After enjoying great prices and incomes in the past few years, they are now looking at a sobering future. In these times, the Farm Bill commodity programs could provide the difference between your tenant’s survival or failure. The landlord has decisions to make and actions to take that can make a difference in terms of the long-term value of your property and the financial viability of your tenant. I’ll describe 3 types of bad decisions that you should avoid for the sake of your land and of your tenant.

  1. Don’t decide reallocation of base acres with your tenant. Often, the commodity program acres were established years ago, and don’t coincide at all with current crops. That may not cause any problems, in fact, it may be to the tenant’s benefit to keep the old program acres. But it may be more beneficial to select an allocation of base acres according to crops planted in the recent past. If you as the landowner don’t work with the tenant and make the choice by March 31, 2015, then the current allocation will be fixed for 2014-2018. For example, your land in King William County may have had base acres for oats, with $0 projected payments in 2014-2018, but if soybeans have been planted on that land in recent years, it may be possible to update the base acres to soybeans, with projected payments in 2014-2018 of $125/payment acre.
  2. Don’t update program crops yields with your tenant. Yields of most crops have improved over the past few years due to genetic improvements and better management. Although the decision to update yields is a “no-brainer”, updating requires cooperation between landlord and tenant because the tenant knows the yields but you as the landowner must certify the updated yields to USDA/FSA. Failing to update yields is leaving money on the table. For example, updating peanut yields in Southampton County could increase potential payments by $34/payment acre if peanut payment yields could be updated by 20%.
  3. Sit on your thumbs, don’t do anything by March 31. You have until March 31 to make the acreage reallocation and yield update decisions and record the choices with USDA/FSA, and your tenant can’t make a choice between Agricultural Risk Coverage (ARC) and Price Loss Coverage (ARC) until after you register your base reallocation and yield update choices. If no choices are recorded with USDA/FSA by the deadline, your farm will be assigned to the PLC program for 2015-2018, and any 2014 payments will be forfeited. The default PLC program may not be a bad choice for some crops, but it is a disaster for crops such as soybeans. Using Orange County yields and USDA forecast prices for soybeans, the table below shows estimates of the 2014 and 2014-2018 average ARC-county and PLC payments per payment acre.

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If the landowner doesn’t make the choice of base reallocation and/or payment yield updates, then this farm receives $0 payments for 2014-2018. These payments could have helped to cover the cash rent due to you. Inaction could leave on the table payments averaging $27/acre.

Call your local Cooperative Extension office (http://www.ext.vt.edu/offices/) or USDA/Farm Service Agency office (http://offices.sc.egov.usda.gov/locator/app?state=va&agency=fsa) today.

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