Thursday, May 19, 2011

Farm Cash Rental Rates in Middle America

Note that this post features information about farm cash rents from the Seventh Federal Reserve District's First Quarter 2011 report on Farmland values and credit conditions and from the Iowa State Extension Service. The Seventh district includes all of Iowa, most of Illinois, Indiana, Michigan and Wisconsin. ---KM
  • District cash rental rates for agricultural land in 2011 jumped 16 percent higher compared with 2010.
  • Cash rental rates were up 14 percent in Illinois, 15 percent in Indiana, 16 percent in Iowa, 18 percent in Michigan, and 20 percent in Wisconsin.
  • With 16 percent of farmland on crop shares, 1 percent on a bushel basis, and 3 percent on other arrangements, there appeared to be an inclination by owners to get more involved in farm operations and garner higher returns in 2011.

Next, find Iowa cash rents showing changes from 2007 through 2011.

Source: Iowa State Extensions Service

~Farmland Price-to-earnings Ratio~

With the increase in farmland values matching that for cash rental rates, there was no change in the price-to-earnings (P/E) ratio for agricultural land. The unchanged P/E ratio indicated relatively balanced demand to purchase versus rent farmland. In an asset valuation model, the present price of an asset should reflect both current profitability and expectations for future earnings. The P/E ratio for farmland can be constructed as the ratio of indexes based on average farmland values per acre and cash rental rates per acre (the latter representing the earnings potential of farmland).