The market for farmland right now is hot, and rents are at an all-time high.
Strong commodity prices and high land values are creating a hot rental market for farmland. Across the Corn Belt, cash rents are up for 2012, and some rents are reaching stratospheric levels.
“We continue to see a real strong demand to rent land and a very strong demand to buy land,” reports Jerry Warner, chief management officer, Farmers National Company. “It is driven by profitability. Over the past three years, higher commodity prices are factoring into a farmer’s desire to control more land, and therefore they are very aggressive bidders when given the opportunity.”
How aggressive? “I’m aware of cash rents of $600 in Iowa,” Warner says. “I don’t know if that is the highest. There does seem to be a lot of rents between $400 and $500.”
The highest rents occur when farmers compete head-to-head for land. “We are seeing increases when a farm is exposed to the market,” he says. “Where a parcel is exposed to even a handful of farmers, they compete very aggressively. We’re seeing 25 to 45% increases compared to 2011.”
The current profitability of corn/soybean production is making the rents possible. “If you are budgeting $5.50 corn and good yields, then you can pay a pretty substantial cash rent,” admits Gary Schnitkey, University of Illinois ag economist.
“Crop farming has been profitable and it looks like 2012 will be another profitable year.”
This year could be one of the most profitable years ever for corn and soybean farmers. Warner says it is the most profitable he has seen since he started in the farm management business in 1972. For example, income for Nebraska farmers is predicted to be up 20% from last year. “It is a good time to be a farmer,” he says.
The big profit margins are driving a spread between high and low rents. “There is such a wide, wide range of rents in the country,” Warner says. “There will be discrepancies of $100 to $200/acre across the fence.”
Reasons for the disparities stem from long-term leases signed before the high prices occurred and family arrangements with lower rental rates. Also, most leases are negotiated privately between landowner and operator and are settled at more modest levels.
Average rents rise
Average rents are much lower but on the rise. In Iowa, the average rent of $214/acre is 16% above last year, according to a survey by William Edwards, Iowa State University Extension economist. This is the highest single-year increase in rents since Edwards started his survey in 1994.
Rents vary widely in Illinois where some of the highest rents are reported. “The average cash rent in Illinois is $200/acre,” Schnitkey says. “In central Illinois with the really productive ground, the average is probably closer to $300/acre.”
Minnesota’s average cash rent for 2011 is $135/acre, according to USDA National Agricultural Statistics Service figures. This figure reflects the wide range of cropland quality in the state. In south-central Minnesota where the highest-quality land is available, rental rates are higher. “Rents have increased from $175 to $250/acre,” says Dale Nordquist, associate director, Center for Farm Financial Management, University of Minnesota. “Those rates would have blown our mind a few years ago. And I’ve heard of higher rents of $400+ anecdotally.”
Indiana has similar spreads in cash rents. Figures from Purdue University show rent for top-quality land is $230/acre this year, which is nearly 14% more than last year. Average-quality land is $182/acre, a 13% increase, and poor-quality land is $141/acre with a 13.7% increase.
With big profits in corn and soybeans, landowners are taking a new look at crop share. “In the last 20 years, there’s been a slow switch from crop share to cash rent,” Schnitkey says. “That has stopped because crop-share leasing hasn’t been bad for the landlord recently. And if anything, we see cash rent moving to flexible rent. Most professionally managed land is on a flexible lease with minimum cash rent plus a bonus.”
Farm managers at Farmers National Company are using more flexible lease agreements, Warner says. “Because of the volatility and the unknown of commodity prices a year from now, we advocate a portion of rent be tied to commodity prices,” he explains. “We have some leases tied to crop insurance prices. This last year, we had about 10% of our leases with a variable component tied to prices. This coming year it will be more.”
Warner adds that most operators prefer flexible leases as opposed to paying a top-of-the-market rent. If commodity prices fluctuate, the operator has a cushion.
Another trend in farmland is the transfer of ownership from the World War II generation to the baby boomers. Warner says many of these new baby-boomer landowners are at a stage in their lives where they don’t need to sell the land and instead see it as a good alternative investment.
As a result, business for farm management companies is up. “Our new business has been tremendous,” Warner says. Farmers National manages more than 5,000 farms in 23 states. Often, these new landlords need help handling cash rents. Warner’s group offers market discovery for rent and other investment analysis.
He says they usually don’t know what the land will bring. “We put it up for rent to see what it goes for,” he says. “And almost always, we’re surprised. Farmers think the land is worth more than we do. For farm managers, these are super-exciting times.”
Farm operators who pay high cash rents will need to manage the risk. Minnesota’s Nordquist says operators should resist leases with high rental payments for long periods of time.
In addition, operators should lock in profitable prices for their crops and lock in the cost of their inputs. “A shock to the system like the 2009 fertilizer prices will do some damage if operators have to pay high rental rates for a couple of years,” Nordquist says. “Don’t get lulled into thinking these margins will be there forever.”
Warner agrees that risk management is very important. “The number-one challenge for managers today is to manage volatility,” he states. “We have more volatility in one day than we used to see in one month. So managing the volatility through commodity sales made at profitable levels is important.
“On the flip side, you should lock in your inputs, too,” he continues. “Lock down prices on fertilizer, seed, chemicals, so you can lock in a profitable margin. Then you can gamble with levels beyond the profit needed to stay in business.
“I don’t advocate selling a whole crop, but certainly take advantage of forward pricing a portion of your sales,” Warner says.
With two very profitable years in a row, will the boom times continue? “There’s a part of me that says no, it won’t last,” Warner says. “I’ve got to believe that it will tighten some. Things just can’t be this good too long. And that’s the farmer talking in me.”
Schnitkey agrees. “The guys who have seen the 1980s realize that the good times come to an end eventually,” he says. “So when is that going to happen is the question.”
He says $4 corn could derail high land values and rent. “I wouldn’t expect to see $4 corn next year,” Schnitkey says. “But if we have a good-yielding year and good planting of crops around the world, we could see $4 corn in 2013. Or if something happens in China and they stop buying grain, or there’s a drastic change in ethanol policy, you could see corn come down rather quickly.”