Setting Cash Rents and Variability in Returns
Returns to farmland likely will vary considerably over the next several years. This variability will make it difficult to set a cash rent that can remain the same for several years. Prices projected for 2015 are lower than likely long-run prices. As a result, cash rents based on 2015 returns may have to be raised in the future. Similarly, rents may need to be lowered if those cash rents were set based on returns in 2010 through 2013, particularly given that prices in 2010 through 2013 were above likely long-run average prices.
Forecasts of 2015 Market Year Average Prices based on Projected Prices for Crop Insurance
The 2015 market year average (MYA) prices for corn and soybeans are forecasts using the same futures contract prices as are used to set projected prices on crop insurance products. Prices during the first two week of February indicate projected prices of $4.15 per bushel for corn and $9.60 per bushel for soybeans. Resulting forecasts of 2015 MYA prices are $3.97 per bushel for corn and $9.84 per bushel for soybeans. Given these forecasts, Agricultural Risk Coverage – County Option (ARC-CO) is projected to pay more than Price Loss Coverage (PLC) over many counties in 2015.
Do Futures Forecast the Future
A common presumption is that futures prices can predict future price, specifically the price during the last or delivery month of trading on a futures contract. This presumption has potential importance for both marketing and policy. Many crop insurance contracts use futures prices to establish their pre-plant and harvest prices. In addition, it is common to hear that futures prices should be used to forecast prices when evaluating the farm program choices in the 2014 farm bill. This article calls into question the presumption that futures prices can predict future price. It also finds that cash price performs as well as futures price in forecasting future price. Because of the technical nature of the analysis, the article begins with its summary observations. Readers can then decide if they want to read the details of the analysis.