Thursday, December 2, 2010

Farmland Cash Rents

November 2010 Farmland Price Report #3
by big picture agriculture

Note that this is the third in my series of November 2010 farmland price reports. This report focuses on farmland cash rents from articles I've gleaned over the past three months which include the states of Iowa, Nebraska, North Dakota, Minnesota, and Indiana. Over the next few days I will be posting my updates on international farmland prices, institutional investors in farmland, much on the subject of land acquisition globally by foreign ownership, and a lengthy commentary concerning the current upside and downside risks of investing in farmland in 2010.

November 2010 Reports to date:


Cropland rental rates averaged $176 per acre in 2010, up $1 per acre from 2009. This was the highest value ever recorded in the USDA annual survey. Cash rent for pastures averaged $40 per acre in 2010, a decrease of $3 from the previous year. Rent as a percentage of land value was unchanged.

Land values shoot upward with commodity prices (Iowa) — As for cash rent, the average price for non-irrigated ground was $176 this year in Iowa, up $1 from 2009, the U.S. Department of Agriculture reported in September. Grundy County was the highest in the state at $209....Some growers are paying $300 to $400-plus per acre for cash rent, which is twice to almost three times the going rate in some counties.


UNL [pdf]: 2010 Nebraska Cash Rents


Indiana Farmland Values & Cash Rents: Renewed Strength in a Weak Economy — (AUG 2010)One important contributor to the value of farmland is the annual rent obtained from ownership. State-wide, 2010 cash rents increased. The average for top quality land increased $4 per acre. For average and poor quality land, the average increased by $3 per acre. The average estimated cash rent was $202 per acre on top quality land, $161 per acre on average quality land, and $124 per acre on poor quality land. This was an increase in rental rates of 2.0% for top quality land, 1.9% for average quality land, and 2.5% for poor quality land. State-wide, rent per bushel of estimated corn yield was $1.02 to $1.08 per bushel. For top quality farmland, cash rent as a percentage of farmland value was 3.8%. For average and poor quality farmland, cash rent as a percentage of farmland value was 3.6% and 3.5%, respectively. These percentage values were lower than the values reported in 2009. After increasing last year, these percentages are again declining. Over the 36-year history of the survey, rent as a percentage of farmland value has averaged 5.8%.


Changes in area cash rent also varied across the state. The strongest percentage increase in cash rent was in the Central region. Here cash rents increased from 2.4% to 3.8%. This was followed by the West Central region with increases between 1.4% to 2.3%. The cash rent changes in Northeast and the Southeast Indiana ranged from 0.0% to 3.6%. Constant or declining cash rents were reported in the North region. The Southwest reported a decline in cash rents for all land qualities. The highest average per acre cash rent is $225 per acre for top quality land in the West Central region. With a range in per acre rents of $147 to $225, this region has the highest cash rents across all land qualities. Cash rents are the lowest in the Southeast, $86 to $151 per acre. Differences in productivity have a strong influence on per acre rents. To adjust for productivity differences, cash rent per acre was divided by the estimated corn yield. Rent per bushel of corn yield in the West Central region ranged from $1.13 to $1.15. Cash rent per bushel of corn yield in the North, Northeast, Central, and Southwest regions are similar, ranging from $0.95 to $1.10 per bushel. Per bushel cash rent in the Southeast ranged from $0.85 to $0.92 per bushel.

Indiana farmland values growing — The Purdue survey also showed that cash rents increased 2 percent to 2.5 percent statewide (Indiana). For the first time, cash rent for top-quality land rose more than $200 an acre to $202 an acre. That isn't welcome news for farmers such as Jerry and Susie Hayden in Eagle Creek Township who, with their extended family, cash rent about 85 percent of the 4,000 acres they plant. "We're looking at a variable cash rent (for the future)," Susie said. "In a good year, the landowner shares in it. In a not so good year, they share in that, too. Now, the farmer takes all the risk. Regardless of drought or disaster, the landowners get their money." Walt Sell, the Lake County Purdue Cooperative Extension director, said a variable cash rent makes sense for all parties. "An adjustable cash rent is viable, so the landowner can share in the profit," he said. Sell thinks cash rent rates should be re-evaluated annually by the landowners and renters. "Earlier is better than later because in the last quarter the tenant will be purchasing his inputs (farming expenses such as seed and fertilizer)," Sell said. "The agreement should be in writing, and it should be well-written." He added that verbal arrangements, a common practice, can create problems. Susie Hayden said she and her family also have share-rented. That means the landowner shared in input costs at the beginning and in the profit after harvest. Crown Point landowner Marie Segert still has a 50-50 share-rent arrangement with her tenant farmers. When harvest comes, she is as invested in the outcome as her renters, she said.

North Dakota:

ND farmland value, cropland cash rent prices continue to grow — (Aug. 2010)Renting cropland in North Dakota was also more expensive in 2010, with the average price at $46.50 per acre, a 2.2 percent increase from 2009 and 9.4 percent higher than in 2008. However, cash rent for pasture land fell by a dollar from 2009 to $13 per acre in 2010. This compares to a cash rent figure of $13.50 in 2008.... Cash rents per acre paid to landlords for cropland in 2010 rose $3, or 3 percent, while pasture rental rates remained unchanged. Cropland cash rents averaged $102 per acre, compared to $99 for 2009. Pasture cash rents averaged $11 per acre.


Farmland rents rise — A typical southern Minnesota corn/soybean farmer plants about 1000 acres of crops. If that farmer happens to rent all the land, that rental bill alone is $150,000. He says land rental rates have increased steadily the last few years. For 2009, rental prices increased almost 9 percent. That means for the best farmland in the state rental rates are $150 an acre or more....He says a rule of thumb is that a typical farmer owns anywhere from a quarter to a third of the land they plant each spring, the rest is rented. So as rental rates go up, their cost of business continues to increase. Those higher bills take some of the luster off surging grain prices.


Farmgate: Land Prices: Are They Going Up or Down? — Schnitkey says land prices have moved upward faster than cash rents, and have been that way since 1986 when cash rent was more than 8% of the value of farmland. He says since it reached a low of 3.4% in 2008 and has been 3.5% the past two years. While declining rent may indicate a softening of land values, that is not the current case.

In his statistics and graphs, the one sounding some warning bells was the fact that farmland prices have increased faster than cash rents since 1987. Schnitkey states, "In essence, the return on which farmland price is based is becoming a less of a percent of farmland price."

The next key paragraph is in Schnitkey's conclusion:
At this point, farmland returns and cash rents appear to be under no downward pressure over the next several years. In fact, recent commodity price increases likely will cause cash rents to increase. These rental increases may support farmland price increases over the next several years. Farmland price increases in the 3% range over the next year would cause prices to still be in line with capitalized values.