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Cash Rent Talks Set to Take Center Stage, Economists Say
Now that harvest is rapidly winding its way way to completion, many farm tenants and landowners will quickly turn their attention to cash rental rates for 2017.
Cash rental rate decisions and discussions can often be challenging, especially in times of rapid commodity price changes. It is no surprise that cash rent and farmland values probably account for the largest number of questions we receive from readers and seminar participants.
Since David and I started writing these articles, we’ve written extensively about cash rental rates. For instance, David recently addressed how rental rates changed at the county level in this post. I was recently reflecting on the articles and topics that we have addressed in the last two years and came across the second post that we published on this site. It provided a perspective on changes in cash rental rates from mid-2014.
I have copied it below since many of our current readers may not have had a chance to read it. I think much of the content and topic is quite relevant today, and I think readers will find the discussion of the cash rental adjustment process interesting.
Just to set the stage, in 2014 commodity prices had just begun their decline and there was a lot of discussion about whether rental rates would quickly adjust lower. At the time it was not clear that commodity prices would remain at depressed levels. In the post we talked about how expectations would influence cash-rental adjustments. We noted that we had rarely seen cash rental rates decline by more than 5% in any single year. In analyzing the situation, we plotted cash-rental rate changes for Indiana farmland.
The data shows that the declines have now begun to accelerate, as the likelihood of sustained low commodity prices has taken hold. In 2016, cash-rental rates declined by 10.9%, the second-largest decline seen in the data. The only larger decline occurred in 1986 when rates fell by 11.2%.
Clearly, cash rents are working lower. Simply put, farm economics drive cash rental rates. If farm economics undergo a sustained period of decline, one should expect rents to follow. However, I think that at the time we did not expect the prolonged downturn in farm economics that we are now experiencing.
It appears that rents may have indeed overshot to the upside in the great commodity boom. As we noted in 2014, the cash rental rate adjustment can be significant in such situations. A number of factors will determine where things go from here. They include how long commodity prices remain depressed and whether the declines continue. As we noted in 2014, government program payments will also play an important role. With payments set to start declining for crops planted in 2017, one might expect that this, too, will work against cash rental rates.
Time will tell.