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The Cash Rent Spectrum Is Wide
Depending on where you live, you might be amazed by how high or how low cash rents are in other parts of the country.
When I talk to farmers in Colorado, they can’t imagine the rents in Illinois and vice versa.
A couple of years ago, some landlords in Iowa and Illinois were receiving $500 per acre in cash rent for Class A fields. At the same time, some marginal hay fields in Missouri were renting for, well, zero. A number of my clients who own farms in Missouri let nearby farmers harvest the hay crop for free in order to avoid paying someone to brush-hog the farm.
The cash rent spectrum is wide and ever-changing. In Illinois alone, the average cash rent by county ranges from $55 to $301 (per the University of Illinois), but let’s look beyond Illinois at where cash rents are around the country.
According to the USDA National Agricultural Statistics Service, the top three states for average cash rent per crop acre were: California $309, Iowa $235, and Arizona $222. As a Midwesterner, I will mention that if we exclude irrigated crop acres, the top three would be: Iowa $235, Illinois $220, and Indiana $190.
On the other end of the spectrum, the bottom three states are Montana at $32, Oklahoma at $32, and Texas at $38 per acre. I happen to know that cash rents get even lower than that in some places. Even though the state average cash rent in Colorado is $72, nonirrigated cash rents in eastern Colorado can be as low as $15 an acre (unless someone is getting less than I am.)
So, where are the rents heading? They tend to go up slower than commodity prices call for and go down slower than gross profits demand. Average cash rents in California were down $20 an acre in 2016 vs. 2015, and average cash rents in Iowa were down $15 an acre – 6% in both cases. The overall national average declined $8 an acre from $144 to $136 between 2015 and 2016, which is 5.5%.
While the average cash rent in Illinois may have declined around 20%, cumulatively, over the last three years, that has happened gradually.
Particular farms may have had no cash rent reductions at all due to long-term leases or farmers’ fear of losing highly productive land. Cash rents out of sync with the market lead to pressure that has to be released, and it gets released by sudden, drastic reductions sometimes. Occasionally, a farmer has to say, “I have to reduce the rent by 20% or I can’t farm your field anymore. It’s just the math of the matter.”
I know that some landlords of top-end fields in Illinois have had to renegotiate rents downward recently by 10%. It’s easier to stomach if they paid $7,500 per acre 15 years ago than if they paid $15,000 an acre a few years ago with heavy leverage.
Rent of $400 an acre is 5.3% on $7,500, but $360 an acre is only 2.4% on $15,000. It’s hard to cover the cost of capital with 2.4%. This illustrates the point that your landlord’s financial situation has constraints, such as pressure to make mortgage payments, just like you have constraints on how much gross profit is available with which to pay rent.
Bottom line, cash rents will go down and then up and then down again someday. They have to change to accommodate all parties.
If landlords can’t make their required return on investment, they stop investing in farmland. On the flipside, if farmers can’t make a net profit and it goes on long enough, they stop farming.