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Economic Normalization In Agriculture
Farmland values in the middle of the country softened slightly in the last half of 2018, yet remain stable overall. This dynamic continues to put pressure on farmers who rent farmland in this compressed margin environment.
Jim Knuth is a senior vice president with Farm Credit Services of America. He says there is a tug-of-war between current land values and the reality of the current revenue being produced by our land. Net farm income has fallen 40%-50% since the height of the commodity price boom, while land valuations have fallen only 15%-20%
"So, what does that normalization look like as this disconnect starts to come together? The answer is simple, right? Farmers renting ground with a reasonable chance for profit, what can a farmer afford to pay, and certainly the land owner getting a reasonable return on their owned asset," says Knuth. "That’s what economic normalization is going to look like in the months and years ahead."
Knuth says years of data shows a farmer should expect to pay 30%-35% of expected gross revenue per acre. However, fluctuating markets and uncertain yields make it difficult to set a fair cash rental rate. The right rental strategy will help bring alignment.
"It’s a perfect time for a flex lease," he says. "If you’re a landowner, why would I want to enter into a flex lease now? Because the best time is at the bottom of the cycle, right? So, each party can share equitably as our cycle improves."