Using the Productivity Index to Figure Cash Rents
Right now farmers are in the middle of negotiating 2018 cash rents. This while their incomes have been depressed for four years. Agricultural economist Gary Schnitkey has been working up a way for landowners and their tenants to feel better about bringing cash rents down.
The University of Illinois number cruncher has developed a formula to derive cash rent from a fields P.I.. That's the Productivity Index. It is benchmarked, in a fashion, to USDA's Cash Rents Survey and uses a geographic adjustment tied to the CRD, that's USDA's Crop Reporting District. This allows for demand patterns in an area to show up in the formula. Schnitkey, in a farmdocDaily article says the P.I. and CRD adjustment explains 91% of the variability in the average cash rents as reported by USDA. Here's how the formula, he says, works in the state of Illinois, "Just to give you an example, if you are in east-central Illinois, in the eastern CRD, the CRD index is 26. This means you take your P.I. multiplied by 2.79, then subtract 147 and add 26 to it that will give you an average cash rent for that parcel.
Again, the formula is... Cash Rent = (2.79 x PI) - 147 + the CRD Adjustment... ...in this case 26.
If you fill all those numbers in for a farm in Champaign County with a P.I. of 134 the expected average cash rent for that farm with a 134 P.I. would be $253 per acre. This...benchmark...says Schnitkey provides a jumping off point from which farmers and landowners can discuss adjustments based on current economic conditions. By the way, the P.I. of farmland in Illinois, many farms around the nation, can be found in a free online tool called Acre Value. Look for it at www.acrevalue.com.