Demand Keeps Cash Rents Steady
Relatively low grain and soybean prices and reduced farm profitability have done little to dent demand for cropland, meaning cash rent prices will remain steady in the next 12 months.
The average rental price for cropland in the U.S. last year was $136 an acre, according to the USDA. Iowa and Illinois, the biggest growers of corn and soybeans, were the leading Corn Belt states at $231 and $218 an acre, respectively.
Crop prices, meanwhile, have held steady. The average price in 2016-2017 was $3.36 per bushel, the government says. Futures this year that are forecast from $3.25 to $3.55 per bushel are expected to average from $3.40 to $4.40 next year, according to data from the USDA.
Farm income, however, is expected to decline in 2018. Gross cash farm income is pegged at $404 billion, down 2% from last year. Net farm income is seen declining 8% in 2018 to $59.5 billion, the USDA says.
Whether it’s optimism about crop prices, the desire to purchase land that adjoins fields they already own, or simply faith in their abilities, farmers are snapping up land as soon as it becomes available, and that’s underpinning rental rates.
“Cash rents are staying pretty competitive,” says Jason Britt, president of Central States Commodities, a brokerage in Kansas City, Missouri, whose family farms land in northern Missouri. “They adjusted up after 2012 because commodity prices were high. We’ve seen some adjustments down, but it seems like it’s competitive enough out there that it’s keeping things bid up.”
Michael Langemeier, an agricultural economist at Purdue University in West Lafayette, Indiana, says cash rents will probably hold steady this year, but he notes that farmers should be closer to breakeven than they have been in the past four years.
While some renters may feel squeezed by landlords who leave rents unchanged or raise them slightly, data show owners may be justified in not reducing what they charge.
“Agricultural land values for the Seventh Federal Reserve District showed signs of stabilizing in the first quarter of 2018, as farmland values were unchanged from a year ago,” according to a report from Federal Reserve Bank of Chicago senior business economist David Oppedahl.
Quality farmland values in the first quarter rose 1% from the fourth quarter of 2017, the report said, citing survey responses from 181 agricultural bankers in the seventh district, which includes Iowa and parts of Illinois, Wisconsin, Indiana, and Michigan, an area that accounts for 40% of corn, soybean, and hog production in the U.S.
Adam Thien, vice president of Thien Farm Management in Council Bluffs, Iowa, says he expects cash rents to be steady to slightly higher in the next 12 months. Landowners in his area are, in general, demanding higher rents to maximize their profits, but some renters are pushing back, at least a little, he says.
space to turn around
To effectively negotiate their rates, producers should be able to show their breakeven costs.
“I encourage tenants to bring in a budget for their farm to show not only myself but also the landowner how they’re justifying rental rates so they can remain profitable,” he says. “There are some high rental rates around that are paid by tenants. I don’t know their justifi-cation for paying $20 or $30 or $40 an acre more than other tenants (on high-quality land) in the area.”
Farmers tending to quality land that consistently produces high yields aren’t willing to just walk away knowing that they could be profitable even during tough times. They want to maintain control of high-production cropland because if they give it up, they don’t know if it’ll ever be available again, Thien says.
It’s that type of demand that’s keeping land prices and cash rents underpinned.
“Tenants who’ve been willing to walk away are usually on the lower-producing or less-consistent farms,” he says. “That’s where we’re seeing tenants say they’re willing to walk away. The higher-producing farms are bringing in the higher rental rates.”
Randy Hertz of Hertz Land Management in Nevada, Iowa, says land prices and cash rents rose for 15 years until only recently, and they have steadied since. It was easier – and beneficial – for renters to sign three- to five-year leases because they could lock in a price.
USDA data backs his assertion. The average value of an acre of cropland in the U.S. in 2003 was $1,660, according to the National Agricultural Statistics Service. By 2008, the value had climbed to $2,760 an acre; by 2014, it was up to $4,100. Since then, values have held steady. Last year, they averaged $4,090 an acre, according to data from the government.
Because prices have plateaued, it benefits many renters to negotiate rates on an annual basis, Hertz says.
“When we were increasing every year, that was in favor of the renter (to sign a longer-term lease). Now that rents could go the other way, is that the smartest thing to do?” he asks. “You need to negotiate that rent every year because everything changes – yields change and input costs change and seed costs change. So a lot say they’ll do a flex lease, but a lot of flex leases have a pretty high base and don’t flex very much.”
The key to negotiating a fair rental price is knowing exactly where the breakeven point lies, Hertz says.
“You really need to run the numbers and make sure you get them right,” he says. “Farming is a community and it’s based on trust, and most farm owners really trust their farmers.”
Follow The money
While commodity prices and demand for land are the major factors that determine cropland rental rates, another factor may soon rear its ugly head: interest rates.
The U.S. Federal Reserve has hiked its federal funds rate six times since December 2016. The rate affects terms of more than 60 months including land and equipment loans. Rising rates may curb demand as the cost to borrow becomes more than would-be buyers are willing to bear.
Average 30-year fixed mortgage rates nationally are inching closer to 5%. While that’s relatively cheap money, it’s well above where rates have been in recent years.
“The thing holding land prices together right now is cheap interest rates,” Central States’ Britt says. “If interest rates start to rise, that’ll slow farmers’ roll faster than low commodity prices. There’s willingness there, but if interest rates start creeping up, that’ll slow everybody down. It really does make you reconsider.”
Sometimes it doesn’t seem to make sense to take on more land, regardless of where you believes prices will go. That still doesn’t stop some producers from renting or purchasing more. Britt says he’s seen fellow farmers go out of business from being overly confident and paying too much.
“Producers think they’re going to tear it up. They’ll come in and pay $20 or $30 an acre over what another farmer pays, but if they have a (bad) year, they’re out of business pretty quick,” he says.
Still, farmers are an optimistic bunch. They have to be in order to keep doing what they do year-in and year-out. Some years bear fruit while others are a bust, but most growers tend to look at farming in the longer term.
“There is no shortage of farmers out there who are optimistic,” Britt says.