Author: Ryan Loy

Every year, the Farm Service Agency (FSA) national office reviews the Soil Rental Rates used for the Conservation Reserve Program (CRP). The FSA has recently announced that county-average rental rates will be updated based on the 2023 National Agricultural Statistics Service (NASS) Cash Rent Survey results for dryland rent estimates. When considering the prevalent farm lease arrangements and production practices, NASS survey results may not provide accurate estimates. This results in a county-average rental rate that does not reflect typical rent paid in a county. For example, Figure 1 highlights the percentage change in proposed CRP rental rates in Arkansas between 2023 and 2024, where negative values represent counties facing lower CRP rental rates than in 2023. 

Figure 1. Percentage Change in Stated CRP Rental Rates This figure provides the year-over-year percentage change in stated CRP rental rates in Arkansas between 2024 and 2023. (Source: USDA-FSA, 2023)

Several acceptable models can be used to address rental discrepancies or determine an alternative rate. One such method approved by the FSA is the “Share Rent Equivalent Model.” The model intends to infer cash rents in situations (e.g., counties) where share leases predominate available data or where share leasing is the rule rather than the exception. Acceptable supporting data sources for the model include an average of the most recent three years of yield data, including NASS county yields. When NASS yields are unavailable, RMA T-yields can be substituted. 

Arkansas counties are an example, though this model applies to any county in the southeast region of the United States. Given the prevalence of 20% and 25% share leases found in the southeast region and the limited amount of non-irrigated crop production, the model incorporates county-specific production practices and lease structures that more accurately reflect the soil value and environmental benefits of the CRP program. Table 1 utilizes the “Share Rent Equivalent Model” to determine an alternative cash rent for 20% and 25% share leases under a wheat/soybean double cropping system for Arkansas County, Arkansas.  

Table 1. Share Rent Equivalent Model for Wheat/Soybean Production, Arkansas County

The results in Table 1 more closely resemble non-irrigated cash rents in the representative county, particularly in the current commodity market environment for grains. Figure 2 is a map of alternative CRP rental rates derived from the “Share Rent Equivalent Model” for 20% crop-share arrangements in predominate agricultural counties in Arkansas. Furthermore, the model’s accuracy is determined by calculating the percentage change between the 2023 effective CRP rental rate and the alternative 2024 CRP rates from the model. Figure 3 maps this percentage change for each county in Arkansas. According to Figure 3, our estimates are only marginally higher than what was stated in 2023. Therefore, we can conclude that the “Share Rent Equivalent Model” reflects existing CRP rental rates more accurately than the survey-based approach. Work with your local FSA office to determine if the Share Rent Equivalent model more accurately reflects cash rent in your county.  

Figure 2. Share Rent Equivalent CRP Rental Rates at 20% Crop Share (2024) This figure provides the per acre share rent equivalent CRP rental rates under a 20% crop share. (Source: USDA-FSA, 2023)

Figure 3. Percentage Difference in the Share Rent Equivalent at 20% and Stated CRP Rental Rate This figure shows the percentage difference in the 2024 share rent equivalent and the 2023 stated CRP rental rate. (Source: USDA-FSA, 2023)

References

USDA-FSA. (2024, January). 2023 ARC-County Benchmark Yields and Revenues as of January 5, 2024. Retrieved January 31, 2024, from https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index.

USDA-FSA. (2022, October). 2022 ARC-County Benchmark Yields and Revenues as of October 31, 2023. Retrieved December 20, 2023, from https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index.

USDA-FSA. (2023, December). Provisional County-Average Rental Rates to Determine CRP SRR’s for FY 2024. Retrieved January 30, 2024, from https://www.fsa.usda.gov/Internet/FSA_Notice/crp_1012.pdf.

USDA-NASS. (2022, August). Arkansas Cash Rents County Estimates. Retrieved December 20, 2023, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/County_Estimates/2021-2022/22_AR_cash.pdf.

USDA-RMA. (2023). USDA-RMA Actuarial Data Master.

Loy, Ryan, and Hunter Biram. “Using the Share Rent Equivalent Model to Determine Farmland Value.” Southern Ag Today 4(9.3). February 28, 2024. Permalink

Using crop insurance to guarantee debt obligation coverage is one of many ways insurance can be used as a risk management tool. Additionally, adequate crop insurance will often be a lender requirement on operating loans. Operating loans are typically revolving lines of credit that assist in covering pre-harvest expenses (e.g., seed cost, fertilizer, fuel, etc.). Table 1 below contains example revenue and pre-harvest expenses that might be incurred by a soybean and cotton producer in the southern region. Assume an example soybean producer in Crittenden County, Arkansas and a cotton producer in Lubbock County, Texas, where the farm-level soybean and cotton Actual Production History (APH) yields are equal to the state average of 50 bushels per acre and 1,196 pounds per acre, respectively. Furthermore, we assume the Projected Price for the 2024 growing season to be $12.60 per bushel for soybeans and $0.87 per pound for cotton. 

Table 1. Simplified Sample Budget for a Southern Soybean and Cotton Producer

Consider a producer who finances an operating loan to cover their pre-harvest expenses (e.g., $145,000 based on a 446-acre soybean operation). Additionally, they elect to use Revenue Protection (RP) crop insurance to guarantee a level of revenue. For example, at a coverage level of 50%, a soybean producer would be guaranteed $140,490 based on an expected revenue of $280,980 ($280,980 * 0.50 = $140,490). The question becomes, at what level will the RP guarantee cover the entire operating loan obligation in the case of a complete loss? Additionally, we consider a producer taking Catastrophic Risk Protection Endorsement (CAT) coverage that triggers in the event of a yield loss of 50% or more. CAT coverage provides producers with low-cost coverage on 50% of APH yield and 55% of the RMA projected price (Biram and Coble, 2023). We assume total yield loss (e.g., 0 bushels per acre). Tables 2 and 3 below highlight realized returns to a soybean and cotton producer net of their operating loan obligation. Returns are compared over an interest rate range of 5% to 10% (.5% increments), and RP elected coverage levels from 50% to 65% (5% increments).

Table 2. Returns Above $145,000 Operating Loan (Soybean)

Table 3. Returns Above $250,000 Operating Loan (Cotton)

If the dollar value within Tables 2 and 3 is positive, then operating loan debt is covered with additional funds to pay other obligations. If the amount is negative, a producer would be unable to re-pay their entire operating loan only using RP or CAT indemnities. It’s important to note that pre-harvest expenses are only an estimate. We assume an annual interest rate with the producer paying the operating loan in one lump-sum at the end of harvest; that is, if the annual interest rate is 5% and payment is made at the end of harvest (assuming 9 months) with an operating loan of $145,000, the final payment will be $150,529 (principal plus $5,529 accrued interest).  

Crop type plays an important role in this decision since positive cash flow is heavily dependent on coverage levels and operating loan interest rates for a specific crop. Also, under no circumstance does CAT coverage ensure either producer can cover their operating loan debt at the representative loan, farm size, and crop type. Tables 2 and 3 show that operating debt coverage based on a 50% RP coverage level will be negative regardless of crop type. Increasing coverage to 60% would mean a soybean producer could guarantee covering their operating loan, while a cotton producer needs at least 65% coverage to guarantee operating debt repayment in the event of a catastrophic loss.  

References

Biram, H.D. & Coble, K. H. (2023). A Brief History of Crop Insurance. University of Arkansas System Division of Agriculture, Cooperative Extension Service Fact Sheet No. FSA70. (Link)

USDA-NASS. (2023, February). Farms and Land in Farms 2022 Summary. Retrieved October 12, 2023, from https://downloads.usda.library.cornell.edu/usda-esmis/files/5712m6524/bk129p580/2z10z2698/fnlo0223.pdf.

USDA-NASS. (2023, January 12). Arkansas Crop Production. Retrieved October 12, 2023, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/Crop_Releases/Annual_Summary/2022/arannsum22.pdf.

USDA-RMA. (2023, October 1). RMA Price Discovery. Retrieved October 12, 2023, from https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/Reports/CurrentPeriods.

Loy, Ryan, and Hunter Biram. “Crop Insurance as a Safety Net for Operating Loan Obligations.“ Southern Ag Today 3(43.3). October 25, 2023. Permalink

Since March 2022, The Federal Open Market Committee (FOMC) has enacted eleven interest rate hikes accounting for a 525-basis point (5.25%) increase (FRED, 2023). We discuss how increasing this rate impacts agricultural lending in 2023.

The Fed Funds rate indirectly impacts the cost of other market interest rates such as those for agricultural operating loans. The FOMC influences rates by managing available cash (money supply) in the financial sector. In terms of supply and demand, if cash is limited then the cost to borrow available cash (interest) increases, and borrowing is deterred. The Fed utilizes these tools, in either direction, to slow down the economy in times of rising inflation or to reinvigorate economic activity in recessionary times. 

According to the Kansas City Fed (2023), operating loan rates are typically higher than the effective federal funds rate. A survey of lending terms to farmers for the tenth financial district showed that, on average, a producer is paying an 8.03% interest rate compared to 3.66% the previous year. Agricultural lending has become increasingly expensive, creating additional financial stress in the agricultural sector. Table 1 is derived from budgets across the southern region. Included are estimates of primary pre-harvest expenses that might be included on an operating loan. 

Table 1. Southern Region, Select Pre-Harvest Production Costs

Interest costs for Q2 2022 and 2023 (see Table 1) represent the cost of borrowing the capital needed to cover the listed production expenses at either 2022 or 2023 rates. Interest is estimated by totaling the select per acre production costs and multiplying it by the prevailing interest rate ($520*0.0803 = $41.76). It’s worth noting that these expenses are only a subset of production costs.  The impact on interest expenses will increase as individual operating loans include other costs of production. Additionally, higher interest rates are putting considerable pressure on the financing cost of equipment and land ownership.

Producers are now faced with paying over double the cost per acre in interest for 2023 than if they were to take out the exact same loan in 2022.  Keep an eye on decisions out of the September FOMC meeting as it may hint to the Fed’s future choices to raise rates through 2023. If inflation continues to decrease and underlying economic activity slows, the need for further interest rate hikes may diminish.    

References

Board of Governors of the Federal Reserve System. (2023, July 27). Open Market Operations. Retrieved July 27, 2023, from https://www.federalreserve.gov/monetarypolicy/openmarket.htm.

Federal Reserve Bank of Kansas City, (2023, July 19). Ag Credit Survey. Retrieved July 19, 2023, from https://www.kansascityfed.org/agriculture/ag-credit-survey/.  

Loy, Ryan. “The Federal Funds Rate Impact on Agricultural Lending.” Southern Ag Today 3(34.3). August 23, 2023. Permalink